Illawong Village Pty Limited v State Bank of New South Wales - [2004] NSWSC 18

No judgment structure available for this case.

CITATION: Illawong Village Pty Limited v State Bank of New South Wales [2004] NSWSC 18

HEARING DATE(S): 3/11/03 - 6/11/03, 10/11/03 - 13/11/03, 17/11/03 - 21/11/03, 24/11/03

JUDGMENT DATE:
4 February 2004

JURISDICTION:
Equity

JUDGMENT OF: Campbell J

DECISION: Overcharging not established

CATCHWORDS: CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - construction and interpretation of contracts - variation of terms of mortgage by terms of later mortgage securing same debt - WORDS AND PHRASES - "in default of" - EVIDENCE - burden of proof, presumptions, and weight and sufficiency of evidence - proof of a negative proposition - oral evidence concerning events long past - WORDS AND PHRASES - "due" - BANKING AND FINANCIAL INSTITUTIONS - banker and customer and business of banking generally - term loan - whether demand needed before loan is repayable at or after expiry of term - CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - discharge, breach and defences to action for breach - accord and satisfaction - elements of - BANKER AND CUSTOMER- factual findings relevant to whether customer had been overcharged interest

LEGISLATION CITED: Limitation Act 1969
Bankruptcy Act 1966 (Cth)
Real Property Act 1900

CASES CITED: 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371
Abrath v The North Eastern Railway Company (1883) 11 QBD 440
Abrath v The North Eastern Railway Company (1886) 11 App Cas 247
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Alghussein Establishment v Eton College [1988] 1 WLR 587
Allen v Tobias (1958) 98 CLR 367
Australian Municipal, Administrative, Clerical and Services Union v Greater Dandenong City Council [2000] FCA 1231; (2000) 101 IR 143
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541
Buckingham & Co v London and Midland Bank Ltd (1895) 12 TLR 70
Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1
Crowley v Glissan (No.2) (1905) 2 CLR 744
Currie v Dempsey (1967) 69 SR (NSW) 116
Doe d. Dacre v Dacre (1798) 1 Bos&P 250; 126 ER 887
Greater Dandenong City Council v Australian Municipal, Administrative, Clerical and Services Union [2001] FCA 349; (2001) 112 FCR 232
Herron v McGregor (1986) 6 NSWLR 246
Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1
IW v The City of Perth (1997) 191 CLR 1
Jones v Dunkel (1959) 101 CLR 298
Ex Parte Kemp Re Fastnedge (1874) LR 9 Ch App 383
Legione v Hateley (1983) 152 CLR 406
McDermott v Black (1940) 63 CLR 161
In Re McHenry; McDermott v Boyd; Barker's Claim [1894] 3 Ch 290
Meehan v Jones (1982) 149 CLR 571
New Zealand Shipping Co Limited v Société Des Ateliers et Chantiers de France [1919] 1 AC 1
Re New World Alliance Pty Ltd (Rec & Mgr Apptd); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425
In Re Newark Pty Ltd (in liq); Taylor v Carroll (1991) 6 ACSR 255
Olifent v Emwest Products Pty Ltd (1996) 14 ACLC 24
The Ophelia (1916) 2 AC 206
Osborn v McDermott [1998] 3 VR 1
Pioneer Concrete (Vic) Pty Ltd v Stule (1996) 14 ACLC 534
Plumor Pty Ltd v Handley (1996) 41 NSWLR 30
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Tallerman & Company Pty Limited v Nathan's Merchandise (Victoria) Pty Limited (1957) 98 CLR 93
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Sutherland v Sunshine Clothing (Aust) Pty Ltd (1995) 13 ACLC 1,808
Watson v Foxman (1995) 49 NSWLR 315
Woolworths Ltd v Crotty (1942) 66 CLR 603

PARTIES :
Illawong Village Pty Limited - Plaintiff
State Bank of New South Wales - Defendant

FILE NUMBER(S): SC 3426/00

COUNSEL: A J McQuillen - Plaintiff
J E Marshall SC; G Lucarelli - Defendant

SOLICITORS: McCoy, Grove & Atkinson - Plaintiff
Minter Ellison - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

4 FEBRUARY 2004

3426/00 ILLAWONG VILLAGE PTY LIMITED v STATE BANK OF NEW SOUTH WALES LIMITED

JUDGMENT

HIS HONOUR:

Nature of the Case

1 Illawong Village Pty Ltd (“Illawong”) borrowed money from State Bank of NSW Limited (“State Bank”) over a period from 8 April 1988 to August 1998. Illawong contends that during two periods of time, namely from 8 April 1991 to 26 July 1993, and from January 1997 until August 1998, State Bank charged Illawong more interest than it was entitled to charge. Illawong seeks to recover the excess interest it claims to have paid, together with interest.

2 As well, Illawong had, and continues to have, borrowings from financiers other than State Bank. Illawong contends that, because State Bank was charging it too much interest, it was less able to reduce its borrowings from those other financiers. Illawong claims damages for the losses it has suffered by reason of this lessened ability to pay the other financiers.

Uncontroversial Facts

3 Illawong’s operations have at all times involved the construction, and then operation, of a neighbourhood shopping centre in the Sydney suburb of Illawong, which lies on the south side of the George’s River and to the west of Como. The shopping centre is constructed on land which was, in 1987 and 1988, in four separate titles. Two of those titles were at all relevant times ones of which Illawong was the registered proprietor. The third was the site of a closed road, which Illawong had contracted on 23 December 1986, to purchase from the Council of the Shire of Sutherland for an amount of $133,175, plus an additional purchase price equal to interest computed from 1 January 1985 to the date of completion on that sum of $133,175, compounded annually on 1 January each year. The fourth parcel of land was another closed road, which was vested in the State of New South Wales at the beginning of 1988. Arrangements were on foot for Illawong to acquire that fourth parcel of land. The details of those arrangements were not gone into fully in evidence, but they fell short of Illawong having a contractual right to acquire the fourth parcel of land. Clause 27 of Illawong’s contract with Sutherland Council obliged the Council to use its best endeavours to arrange for the Department of Lands to transfer that fourth parcel.

4 Illawong had constructed the shopping centre with the assistance of money borrowed from Elders Lensworth Finance Limited (“Elders”). In August 1987, at a time when construction was nearing completion, Illawong approached State Bank for a term loan of $7.75m, said to be for the purpose of refinancing the existing construction finance of $6.5m, and an additional amount of $1.25m for working capital. In August 1987 State Bank indicated it was interested in making such a loan.

5 At that time the directors of Illawong were Mr Barry Alcock, who was a chartered accountant with experience in land development, Mr Ross Davis, also a chartered accountant, and partner in the accountancy practice of which Mr Alcock was a member, and Mr Gregory White, a real estate agent who lived in the suburb of Illawong and had experience in land development. The shares in Illawong were held in 1988 by the directors, members of the families of the directors, and a company in which certain of the directors were interested. By 1992 some other minority shareholders existed.

6 In October 1987 Illawong told State Bank that there had been some variations to the building contract, and in consequence some additional building costs were incurred. However according to Illawong those additional building costs could be accommodated within the $7.75m loan which had been requested.

7 On 17 November 1987 State Bank sent to Illawong a formal letter of approval for financial facilities of $7.75m. It included the following provisions.

“We wish to advise that the Bank has approved the following facilities:

The terms and conditions applying to the facilities are as follows:-

Term Loan Option

· The loan is to be conducted on a separate account styled “Illawong Village Pty Limited Term Loan Account”. No operations will be permitted on this account by the company other than the drawing of the amount of the loan and payment in reduction of the debt on the account. The Bank will, of course, be entitled to debit interest and other charges to the account.

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 0.75% 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. …

· Payment of the Bank’s Debt Administration Fee. This fee is charged at a rate of 0.2% pa and will be debited to the company’s account quarterly. …

· 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 mortgage over 14 residential vacant blocks at Menai (adjacent to Illawong Shopping Village).

iii) Registered first equitable mortgage and floating charge over assets and undertakings of Illawong Village Pty Limited.

iv) 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 respects 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 … .

· 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.

· Notwithstanding any other conditions attaching to the facilities, the whole of the amount owing, together with interest thereon shall at the option of the Bank, without any notice to the company, become payable and the obligations of the Bank hereunder shall cease in any of the following events:-

· if at any time the company fails to pay to the Bank any moneys from time to time owing by the company to the Bank as they fall due, or if there is default under the terms of any other arrangement between the company and the Bank;

· if at any time there is a breach of or default under any other covenant, term or provision of any security held by the Bank from the company or in respect of the company’s indebtedness to it.”

8 On 4 December 1987 the credit committee of State Bank, having been informed that the 14 blocks of vacant land were not available as security, decided to require a margin of 1% over cost of funds.

9 On 11 December 1987 State Bank issued a new facility letter to Illawong, which contained the terms I have quoted from the letter of 17 November 1987, save only that the reference to a margin of 0.75% pa was replaced by a reference to a margin of 1% pa, and the reference to the security including “registered first mortgage over 14 residential vacant blocks at Menai (adjacent to Illawong Shopping Village)” was deleted.

10 After some delay, while State Bank decided whether it was happy with the limited security it could obtain in relation to the third and fourth titles of land, and Illawong declined to accept the finance which had been offered until the State Bank security requirements were known, Illawong executed an equitable mortgage and partly fixed and partly floating charge over all its assets (“the Charge”), in favour of State Bank, on 25 February 1988. The Charge was an “all moneys” mortgage. Part of the definition of “the moneys hereby secured” contained in it was:

“… AND ALSO interest upon all such moneys as aforesaid 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 such interest to be computed from the time or respective times of such moneys being paid or becoming due and to be deemed to accrue from day to day week to week month to month or quarter to quarter as the Bank in its discretion shall from time to time determine …”

11 The Charge contained covenants in the following terms:

“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.”

2. THAT the Mortgagor will upon demand or until such demand at such time or times and in such manner as may have been agreed upon between the Mortgagor and the Bank pay to the Bank the monies hereby secured …

22. THAT the Mortgagor will … execute … and give to the Bank … all such mortgages … over the Mortgagor’s property both real and personal … as the Bank may require from time to time such mortgages … to be prepared … and registered by the Bank’s Solicitor … and to contain such terms … as the Bank’s Solicitor may consider necessary, 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.

AND IT IS HEREBY AGREED AND DECLARED as follows:-

23. THAT the charge hereby created shall operate in manner following:-

a) as a FIXED CHARGE over -

· All real and leasehold property … of the Mortgagor …

39. … 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 …”

12 At a meeting between Mr Alcock and a bank officer on 9 March 1988, Mr Alcock requested an increase in the loan facility, so that it was for an amount of $8.287m. This led to the State Bank writing to Mr Alcock on 11 March 1988, rescinding its approval for facilities totalling $7.75m, and asking for additional information in support of the application for $8.287m. Negotiations over the next few days led to the State Bank writing to Mr Alcock on 15 March 1988, reinstating its offer of a facility for $7.75m, and consenting to there being a second mortgage in favour of Elders. The conditions included “All other terms and conditions of approvals 16 November 1987 and 4 December 1987 to remain.” Those dates were dates upon which State Bank’s internal processes had approved lending on terms set out in the facility letters dated 17 November 1987 and 22 December 1987.

13 State Bank advanced the term loan of $7.75m on 8 April 1988. On that day Illawong gave to State Bank mortgages (“the 8 April 1988 Mortgages”) over the two land titles it then held. Those mortgages had identical conditions. Each contained a definition of “the moneys hereby secured” which included in substance the same wording as I have quoted at paragraph [10] above from the definition of “moneys hereby secured” in the Charge.

14 Each of the 8 April 1988 Mortgages also contained the following clauses:

“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.

FOURTHLY – The Mortgagor will upon demand or until such demand at such time or times and in such manner as may have been agreed upon between the Mortgagor … and the Bank pay to the Bank the monies hereby secured …

8. Upon the occurrence of any of the following events:

(a) the Mortgagor shall fail to pay any sum which is due and payable under this Mortgage on the due date …

then in any of the such events (in this Mortgage referred to as an “Event of Default”) the monies hereby secured shall unless otherwise agreed upon between the parties without notice be immediately due and payable …”

Real Property Act

15 Also on 8 April 1988 a Deed of Priority was entered between State Bank, Elders and Illawong, whereby Elders agreed that the State Bank’s mortgage would have priority for $7.75m plus all interest payable and all costs and expenses which State Bank was entitled to charge. The mortgage which Elders already had over the two land titles which Illawong then had remained on foot, subject to that Deed of Priority. The ongoing Elders finance was granted under a facility letter dated 21 March 1988 which approved an advance of $850,000, for a term of 12 months, at an interest rate of 17.25% if there was no default, and 20.25% if there was default.

16 The costs of the funds which State Bank advanced on 8 April 1988 was 12.97%. Hence the interest rate it charged during the three years of the term loan facility was 13.97% during times when the loan was not in default.

17 On 19 April 1988 State Bank wrote to Illawong, reporting on how the $7.75m had been disbursed on 8 April 1988. The letter stated, “Interest and debt administration fee only, are payable quarterly, the first such payment being due on 2 July 1988.

18 One of the conditions of the approval of State Bank dated 15 March 1988 was that $270,000 from the settlement proceeds would be retained in a term deposit, for “Water Board, Council and interest”. In fact at settlement $270,600 was placed on a term deposit. That term deposit came to be used for payment of interest to State Bank.

19 In early August 1988 Illawong requested State Bank to advance it an additional $1.8m. One of the purposes of the borrowing was to pay out the second mortgage to Elders. That application was not granted.

20 In October 1989 Illawong made another application to State Bank for an additional $1.6m. That application also was not granted.

21 In December 1989 Illawong made a further application to State Bank for additional finance totalling $1.99m. That application was rejected in mid-January 1990.

22 State Bank also came to provide other financial facilities in connection with Illawong. By mid-December 1989 there was a company called Village Properties Pty Limited, which was owned by Mr Alcock and Mr Davis and operated a real estate agency in the Centre. It had an overdraft from State Bank. As well, State Bank financed some leases for Illawong, and provided a current account for Illawong.

23 On 12 March 1990 Elders served Illawong with a notice under section 57(2)(b) Real Property Act 1900 relating to Illawong’s failure to pay an instalment of interest due in March 1990.

24 On 22 March 1990 St George Commercial Credit Corporation Limited (“St George”) approved a loan of $1.5m to Illawong, for one year, for purposes including the payout of Elders. The interest rate was 20.25% per annum if there was no default, and 22.25% if there was default. On 6 June 1990 State Bank consented to a second mortgage in favour of St George.

25 On 29 June 1990 Illawong, having obtained title to the outstanding two land titles, mortgaged them to State Bank (“the 29 June 1990 Mortgages”). Each of those mortgages was registered under the Real Property Act. Each contained provisions as follows:

“3. The Mortgagor will pay to the Mortgagee interest on the moneys hereby secured as that term is defined in the Memorandum referred to in clause 5 herein.

4. The Mortgagor will pay to the Mortgagee the moneys hereby secured as that term is defined in the Memorandum referred to in clause 5 herein.

5. The Mortgagor will observe the provisions which are deemed to be incorporated herein and which are set forth in the Memorandum filed in the Land Titles Office as number X208233.”

26 Memorandum X208233 (“the Memorandum”) contained the following provisions:

“1.1 When 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 … made or existing from time to time whether in the past, present or the future, between, inter alia, the Mortgagor … and the Mortgagee under which the Mortgagee has provided or agreed to provide to or for the benefit of, inter alia, the Mortgagor … 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 …

1.8 In the event of and only to the extent of any inconsistency between the provisions of the Mortgage and the provisions of any Agreement, the provisions of the said Agreement shall prevail …

1.11 The provisions of this memorandum shall apply to the Mortgagor … to the full extent possible at law and equity. Any provisions that are not applicable or relevant to the Mortgagor … shall to the extent of such inapplicability or irrelevance be excluded.

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 … on the last day of each and every period as determined by the Mortgagee and advised to the Mortgagor … 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 … for that period for calculation of the interest immediately preceding the due date for payment of interest:

2.1.4 (Capitalisation) interest unpaid on the due date shall, on that date and without notice to the Mortgagor … be added to the moneys hereby secured and bear interest at the rate or rates as hereinafter provided for moneys not paid on the due date and shall, at the option of the Mortgagee, be capitalised.

3. Payments and Repayments

3.1 Except as otherwise provided in any Agreement:-

3.1.1 (Payment) the Mortgagor … shall repay the moneys hereby secured upon demand.

3.3 (Overdue Payments) in respect of moneys not paid on their due date … interest by way of liquidated damages shall be paid upon demand on such moneys unpaid … same to be an amount determined by applying the highest of the prevailing interest rates payable on the moneys hereby secured from time to time plus two percent (2%) per annum or such lesser amount or rate as the Mortgagee may in its sole discretion determine to the moneys not paid on their due date … calculated from the date for payment of such moneys … until payment thereof and until payment such interest shall form part of the moneys hereby secured.”

27 Also on 29 June 1990 two Deeds of Priority were entered between State Bank, St George and Illawong. One of them agreed that the real property mortgages of State Bank and St George would have priority so that State Bank had priority for $8m plus interest plus costs of enforcement, St George would have security for $1.5m plus interest plus costs of enforcement, and State Bank would have priority thereafter. The other agreed that charges which State Bank and St George had over the assets and undertaking of Illawong would rank pari passu.

28 On 26 September 1991 a deed was entered into between Mr Alcock, Mr Davis, Mr White, and a company which Mr White was interested in, which provided for the shares in Illawong in which Mr White or his company was interested to be sold to Mr Alcock and Mr Davis for a total of $700,000, payable by instalments over four years. Mr White remained a director of Illawong until 26 September 1991.

29 On 23 July 1993 Illawong and State Bank entered a Facility Agreement relating to, amongst other things, a loan of $8.5m, for a term of three years, at a fixed rate of 2.25% above Cost of Funds.

30 On 23 July 1993 the advance provided for by that Facility Agreement was made. It was only at that time that the term loan which had originally been made by State Bank in April 1988 was repaid. That loan had, from 8 April 1988 until 26 July 1993, been maintained in an account numbered 491315-16 (“the “16” account”). At the time of repayment of that loan, State Bank allowed to Illawong what it described as an “interest concession of $90,192 for a period 7 April 1991 to 25 August 1992”. State Bank’s intent in allowing that credit was to bring the interest which was charged during the period from 8 April 1991 to 26 July 1993 down to 13.97%.

31 On 17 September 1993 State Bank allowed Illawong a further credit of $144,318.26. This arose from State Bank re-calculating interest on the expired term loan so that, from 1 December 1992 to the date of repayment, interest was charged at the State Bank’s Reference Rate plus 2%, rather than at 13.97%. At that time it also allowed Illawong a further credit of $3,156.18.26. This arose from State Bank having previously debited interest to Illawong’s account on the amount of interest which, by making the credit of $144,318.26, it was refunding.

32 The first claim which Illawong makes in these proceedings relates to the interest which State Bank charged on the expired term loan, during the period from 8 April 1991 to 26 July 1993. I will refer to this period, when Illawong did not have any fixed rate term loan on foot, by a convenient terminology which Mr Whitehead used, namely “the Limbo Period”.

33 When the three-year term loan which had been made on 23 July 1993 matured, it was not repaid, and no consensual arrangement for its extension was arrived at. State Bank commenced charging interest, from the date of expiry on 26 July 1996, at its Reference Rate plus a margin of 2%, plus a debt administration fee. State Bank continued to charge interest at Reference Rate plus 2% until the loan was repaid in August 1998. It was repaid largely by being re-financed by Howard Funds Management Limited.

34 Illawong’s second claim in these proceedings relates to the interest charged in the period January 1997 to August 1998. Illawong contends that an agreement was entered into in January 1997 to fix the interest payable at $70,000 per month.

The Plaintiff’s Pleaded Case

35 When Illawong’s Statement of Claim was filed on 2 August 2000 it included a claim for money had and received, arising from the payment of what Illawong said were excessive amounts of interest. It also included a claim for breach of a contract, arising from the facility letters and said to be incorporated by reference in the mortgages, in that State Bank had not carried out a review for the purpose of determining repayment or refinance conditions. Each of those causes of action was struck out by Master Macready on 30 March 2001, as being statute barred.

36 Illawong’s case is now articulated in a Further Amended Statement of Claim filed on 1 October 2003. Implicitly it draws upon section 36(11) Real Property Act 1900, which provides, “Upon registration, a dealing shall have the effect of a deed duly executed by the parties who signed it” to avoid limitation problems by availing itself of the 12 year limitation period arising under section 16 Limitation Act 1969 for causes of action founded on a deed. The steps in the plaintiff’s pleaded case are, in essence:

1. 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” .

2. In the Limbo Period there was no agreement as to the rate or rates of interest to be applied.

3. 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, yet the bank charged more than its cost of funds.

4. 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.

5. 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.

6. In January 1997 there was an agreement whereby interest would be paid at the rate of $70,000 per month until the repayment or finance.

7. Notwithstanding that agreement, the bank charged more than $70,000 per month in the period between January 1997 and August 1998.

37 The parties have conducted the litigation as though two additional claims were made by the plaintiff. The first of those additional claims is an alternative claim, that the rate which State Bank was entitled to charge during the Limbo Period was its cost of funds plus a margin of 1% per annum. The second is a claim for damages for breach of the alleged obligation of State Bank to determine a rate of interest applicable to like accounts, where the rate of interest State Bank would have applied if it had performed its alleged obligation is not confined to cost of funds, or cost of funds plus 1%.

Some Pleaded Issues in Defence and Reply

38 One of the issues which State Bank raises in its defence is that it is not the 29 June 1990 Mortgages which contain the relevant agreement which governs the charging of interest in the Limbo Period, but rather that it is the Charge and/or the 8 April 1988 Mortgages. The Bank puts in issue that there was no agreement concerning interest rate, and says that, if there was no agreement concerning interest rate, then it has decided what interest to charge, and actually charged it.

39 In reply to those allegations Illawong has pleaded that if the 8 April 1988 Mortgages governed the obligation to pay interest, then there was no agreement between the parties about the interest rate payable, nor was there any decision by the Bank as to the interest payable. Alternatively, Illawong says that any decision of the Bank as to the interest payable was invalid because the decision was not communicated to Illawong, and

“The interest rate alleged determined by the defendant was arbitrary, unreasonable, and not made in good faith in the light of the defendant’s then prevailing interest rates equivalent to cost of funds to it.”

40 Even if Illawong succeeded in proving that any determination by the Bank of interest rates was invalid, that would not of itself entitle Illawong to any relief. This is because Illawong’s claim concerning the Limbo Period is not one for money had and received, but is one for damages for breach of a covenant in a deemed deed. This was pointed out by Mr Marshall SC, counsel for State Bank, in the course of address. It did not elicit any application on Illawong’s part to amend the Statement of Claim, to sue for breach of covenants express or implied in the Charge and/or the 8 April 1988 Mortgages. There was some discussion of whether, if such application were to be made, the Bank would have wanted to make enquiries of additional witnesses, or of existing witnesses concerning additional topics, to meet an allegation that it had acted arbitrarily, unreasonably, or not in good faith, but that topic was not explored fully. I propose to decide the case on the basis of the pleadings as they presently stand, together with the two consensual extensions of them which I have earlier identified.

41 I will deal separately with some other issues which arise under the defence and reply. I should here record, however, that in paragraphs 57 to 61 of its defence State Bank alleged that there had been an accord and satisfaction in 1998 concerning any claims of Illawong of overpaid interest. In paragraphs 62 to 66 it had relied on certain clauses in its security documentation giving a contractual effect to certain certificates of bank officers. At the trial the defences in paragraphs 57 to 66 inclusive were abandoned.

The Construction Question – Which Interest Rate Provision Prevails

42 The covenants upon which Illawong sues are ones in the registered 29 June 1990 Mortgages. It is those mortgages which incorporated by reference the Memorandum, which in turn contains and applies the definition of “interest rate” which Illawong pleads is the relevant one. In Tallerman & Company Pty Limited v Nathan’s Merchandise (Victoria) Pty Limited (1957) 98 CLR 93, at 144 Taylor J said:

“… the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement.”

43 I do not see any intention of the parties, as disclosed by the 29 June 1990 Mortgages, to vary the provisions as to interest which are contained in the Charge and the 8 April 1988 Mortgages. At the time State Bank advanced the term loan in 1988, the only contractual provision there was about the rate of interest payable after the expiry of the three-year term was the covenant in Clause 1 of the Charge dated 25 February 1988 (para [11] above), and the covenant in substantially identical terms in the Clause numbered “THIRDLY” in the 8 April 1988 Mortgages (para [14] above). When Illawong granted the June 1990 mortgages, it did so in performance of the obligation contained in Clause 22 of the Charge. It would be odd if mortgages over the two land titles which Illawong did not have in April 1988 effected a change in the provisions which governed interest of a loan which had already been on foot for more than two years.

44 Further, Clauses 39 and 45 of the Charge were contractual agreements that the provisions of the Charge would prevail over the terms of later documents. While it would have been open to Illawong and State Bank to agree that Clause 39 and Clause 45 of the Charge would not apply in relation to some later security, the mere granting of the 29 June 1990 Mortgages does not amount to such an agreement.

45 The same conclusion is arrived at from a consideration of the Memorandum which was incorporated in the 29 June 1990 Mortgages. When the Charge was in existence at the time State Bank advanced the $7.75m, and it was expressly stated in the Facility Agreement that the Charge was required as security, and no part of the facilities would be made available until the security documentation had been executed, the Charge is an “… agreement … under which the Mortgagee has provided … facilities …”, and thus is an “Agreement” within the meaning of the Memorandum. Thus Clause 1.8 of that Memorandum makes provision for the Charge to prevail over that Memorandum, if there is any inconsistency between them.

46 Further, the obligation contained in Clause 2.1.3 of that Memorandum, to use the “interest rate” as defined in calculating interest, is one which is stated, by Clause 2.1 of the Memorandum, to apply “except as otherwise provided in any Agreement”. This reinforces the predominance of the clause concerning interest contained in the Charge. Further, Clause 1.11 of the Memorandum enables the provision about calculation of interest contained in that Memorandum to be excluded.

47 Illawong submits that the provisions concerning charging of the interest rate contained in the Memorandum amount to an agreement within the meaning of Clause 1 of the Charge, and hence, Illawong submits, there is no inconsistency between the provisions concerning interest rate in Clause 1 of the Charge, and the provisions concerning interest rate set out in the Memorandum. I do not accept that submission.

48 Part of the basis upon which Illawong contends there is no inconsistency between the Charge, and the June 1990 Mortgages incorporating the Memorandum, is that the expression “in default of such agreements” in Clause 1.1 of the Charge does not mean “in circumstances where there is no such agreement”, but rather requires there to be a default, in the sense of a breach, of an agreement concerning the rate of interest which is to be paid. Illawong says there has been no breach of any agreement concerning the rate of interest which is to be paid, and so the occasion for Clause 1.1 of the Charge to allow the Bank to charge a rate “as decided by the Bank from time to time” has not arisen. I do not accept that construction of Clause 1.1 of the Charge. What the second part of Clause 1 of the Charge means is that in circumstances where there is no agreement as to the rate or rates of interest to be charged, then the rate which is to be paid is as decided by the Bank from time to time.

49 In Doe d. Dacre v Dacre (1798) 1 Bos&P 250; 126 ER 887 at 258 of Bos&P, 891-892 of ER Eyre CJ said,

“I do not know a larger or looser word than “default”. Abstracted from other words, what does it mean? In the expressions “judgment by default” and “a juror making default” we understand it differently. In its largest and most general sense it seems to mean, failing.”

Woolworths Ltd v Crotty

50 This view of the meaning of “in default of such agreements” is supported by internal matters in the Charge, and the 8 April 1988 Mortgages. Both the Charge, and the 8 April 1988 Mortgages have a provision which includes in the definition of “the moneys hereby secured” “interest upon all such moneys as aforesaid 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 …” A more natural reading of the expression in the context of that definition is that “in default of such agreement” means “when there is no such agreement”. Further, Clause “SEVENTHLY” of the 8 April 1988 Mortgages contains a covenant enabling the Bank to carry out any of the activities which the Mortgagor is required by the Mortgagor’s covenants to carry out, but which the Mortgagor fails to carry out, and providing that:

in default of such agreement

.

“SEVENTHLY”

“in default of such agreement”

“SEVENTHLY”

“when there is a breach of the agreement concerning payment of interest”

“SEVENTHLY”

“when there is no such agreement”

“in default of such agreement”

”THIRDLY”

“THIRDLY”

51 Further, Clause 1 of the Charge, and the definition of “Interest Rate” in the Memorandum, each have a common structure – that interest will be paid at the rates agreed from time to time, and if there is no agreement, at a rate determined in some other fashion. There is no reason why the ”if there is no agreement” provisions ought bear different meanings in the two clauses. If that is so, there is a conflict between them, which is resolved in favour of the provision concerning interest contained in the Charge.

52 The consequence of this construction is that a fundamental premise of Illawong’s case for recovery in relation to the Limbo period, namely that it is the definition of “Interest Rate” in the 29 June 1990 Mortgages which governs the contractual relations between the parties, is not made out. However, in case the Court of Appeal disagrees with the construction I have arrived at, I shall go on to consider factual matters relevant to the plaintiff’s case concerning the Limbo Period.

Organisational Changes Concerning State Bank

53 Over the period relevant to this case, some organisational changes occurred in the State Bank which bear on the case. When the term loan was first taken out in 1988, Illawong’s ordinary point of contact with State Bank was through the branch of State Bank at Riverwood, a Sydney suburb which is near the suburb of Illawong. In early 1991 State Bank decided to separate the administration of commercial banking from other banking transactions, to take commercial banking away from the branches, and centralise control of commercial accounts in regional Business Banking Centres, called BBCs. Part of this process involved transferring managers and other staff who had dealt with commercial lending in branches to regional BBCs. In April 1991 the State Bank established a BBC at Hurstville, to cover the southern metropolitan area. A BBC was also established at Whitlam Square, to cover a different area. Responsibility for particular files was transferred from branches to BBCs progressively over the next few months. In August or September 1991 control of the Illawong file was transferred from the Riverwood Branch to the BBC at Hurstville.

54 The second organisational change arose from the privatisation of the State Bank. State Bank, formerly owned by the New South Wales Government, was sold in June 1994 to Colonial. In connection with that privatisation the State Government gave an indemnity concerning loans owing to State Bank. To administer that indemnity, an Indemnified Loans Committee (“ILC”) was established. In 1996 and 1997 that Committee usually met weekly. Immediately after the privatisation, all of the bank’s loans were indemnified by the government, but as time went on, and Colonial examined the loans, Colonial agreed to various of the loans being withdrawn from the indemnity. The loan which State Bank had made to Illawong was one which remained subject to the indemnity, and on which periodical reports were made from the manager administering Illawong’s account to the ILC in 1996 and 1997.

Staff Involved in Administration of Illawong’s Account

55 Ms Donna Churchland was Manager of the Riverwood Branch in 1990, up to about September.

56 Mr Errol Rowland was the Manager of the Riverwood Branch for approximately September 1990 to September 1991. The Illawong file was at the Riverwood Branch when Mr Rowland arrived there, and he became acquainted with it soon after his arrival. After the BBC Hurstville was established, bank officers at that BBC had some role in supervising the conduct of the account. In about August/September 1991 the making of management decisions concerning the account was transferred to the BBC Hurstville. For all except the last month or so of the time that managerial responsibility for the file was with Mr Rowland at Riverwood, Mr Rowland was assisted by Jon Gillingham.

57 For a few months before managerial control of the file came to BBC Hurstville, Brent Scotten was the Relationship Manager for the Illawong account who was located at BBC Hurstville. Mr Scotten was replaced in that role in about September 1991 by Stuart Fitzpatrick. Mr Fitzpatrick was in turn replaced in that role about June 1992 by Darren Nagel.

58 Owen Eaton was appointed as Manager of the BBC Hurstville in April 1991. He was the most senior person at BBC Hurstville with responsibility for Illawong’s account over the period from April 1991 until around November 1992.

59 Jon Gillingham was moved from the Riverwood Branch to the BBC Hurstville, probably around July or August 1991. There, he continued to assist those senior to him concerning the Illawong account.

60 In August 1992 Brian Salter was the Regional Business Banking Manager for an area known as BB1, which included BBC Hurstville. Owen Eaton reported to him. Kevin O’Neill had a position in Credit Administration at State Bank’s Head Office. Both those men attended a meeting on 25 August 1992.

61 Alan Whitehead was the Head of Business Banking of the State Bank in 1992. In the period from October to December 1992 he had some involvement with the Illawong Account. He ceased being employed by State Bank in the course of 1996. Towards the end of 1996 he was engaged by Mr Alcock as a consultant concerning Illawong’s dealings with State Bank. Around January or February 1997 his role with Illawong changed, so that he came to act as a mortgage broker seeking to obtain a refinance of Illawong’s mortgages.

62 State Bank had a section known as “Special Loans Unit” or “Special Loans Administration”, which was located at Ashfield. This was the debt recovery area of the Bank, which handled problem or defaulting loans. In the first half of December 1992 administration of Illawong’s relationship with State Bank was transferred from BBC Hurstville to the Special Loans Administration at Ashfield. There, Wayne Lyell was the account manager handling the file.

63 In December 1992 Ross Peden was Manager of the Asset Management Group of the defendant. Mr Whitehead described this as an organisation “which identified problem loans for the bank so they could be managed without interfering with the bank’s ‘good book’”. Its relationship to the Special Loans Unit was not made clear in the evidence. Mr Peden had some dealings with the Illawong account in December 1992.

64 The administration of the Illawong account was transferred back from Special Loans Unit to BBC Hurstville in late January or early February 1993. Mr Nagel resumed being the responsible account manager.

65 By 22 March 1993 Steve Footit was undertaking responsibility for the Illawong account at the BBC Hurstville. He continued to be involved with the account until at least March 1995.

66 From 20 November 1995 the administration of the account was transferred to the Asset Management Group at Parramatta, where Ross Williams was the manager in charge of it. By September 1996 Mr Garry Glover, who was then the head of the Asset Management Group, came to have some involvement with the account.

67 After the account was transferred to the Asset Management Group, Patrick Ward also came to have some responsibility for the account, until he left the Asset Management Group around June 1997. Mr Ward had a place in the organisational structure above Mr Williams, but below Mr Glover.

State Bank’s Cost of Funds

68 One of Illawong’s contentions in this case is that during the period from 8 April 1991 to 26 July 1993 State Bank should have charged it an interest rate equal to State Bank’s cost of funds, or State Bank’s cost of funds plus a margin of 1%. For the purpose of these proceedings only, the parties have reached an agreement:

“That for any calculation of damages which requires the Court to determine the “cost of funds” as alleged by the plaintiff, the cost of funds generally, on any given day, shall be deemed to be the Reserve Bank of Australia Cash Rate Target (as attached), on that day plus 0.35%.”

That agreement results in the cost of funds being deemed to be as follows:

Date of Change in Reserve Bank Cash Rate Target	New Cash Rate Target (%)	New Deemed State Bank Cost of Funds (%)
4 April 1991	11.50	11.85
16 May 1991	10.50	10.85
3 Sep 1991	9.50	9.85
6 Nov 1991	8.50	8.85
8 Jan 1992	7.50	7.85
6 May 1992	6.50	6.85
8 July 1992	5.75	6.1
23 Mar 1993	5.25	5.6
30 Jul 1993	4.75	5.1

State Bank’s Reference Rate

69 State Bank had at all relevant times a published rate of interest which it called the Reference Rate. This Reference Rate was the starting point for fixing the rate of interest payable on variable rate loans. During the period relevant to this case, there were very significant movements in the Reference Rate. At the time Illawong drew down its fixed rate facility, the Reference Rate was 13.25% per annum. Thereafter, changes occurred as follows:

Date of Change in Reference Rate	New Reference Rate % p.a.	Date of Change in Reference Rate	New Reference Rate % p.a.
18.4.88	13.50	18.4.90	18.75
9.5.88	13.75	27.7.90	18.25
1.6.88	14.50	13.8.90	17.75
17.6.88	14.75	7.9.90	17.50
21.6.88	15.00	12.9.90	16.75
7.9.88	15.50	22.10.90	16.00
18.10.88	15.75	7.1.91	15.50
3.11.88	16.00	29.4.91	15.00
8.11.88	16.25	3.6.91	14.25
22.11.88	16.50	16.9.91	13.25
9.1.89	16.75	11.11.91	12.25
20.1.89	17.00	14.2.92	11.75
3.2.89	17.50	15.6.92	10.75
17.2.89	17.75	17.8.92	9.90
21.2.89	18.00	31.5.93	9.70
14.3.89	18.50	24.8.93	9.20
23.3.89	18.75	22.9.94	9.70
12.4.89	19.00	14.11.94	10.50
23.5.89	19.25	19.12.94	11.25
30.5.89	19.75	2.9.96	10.75
29.6.89	20.25	30.12.96	10.25
27.9.89	20.50	28.1.97	9.75
29.1.90	20.00	30.6.97	9.25
28.2.90	19.50	28.8.97	8.75

Illawong’s Application to Whitlam Square

70 In the latter part of 1990 Mr Alcock telephoned Ms Churchland, at the Riverwood Branch of the State Bank, and enquired whether the Bank would be interested in refinancing Illawong’s loan when it matured the following April. Ms Churchland said that the Bank would be happy to look at it. However Mr Alcock made no appointment to see anyone at the Branch concerning obtaining refinancing, nor did he submit any documentation to the Riverwood Branch seeking refinancing.

71 In March 1991 Mr Alcock called at the Bligh Street Sydney Branch of the State Bank. He explained to a bank officer there that Illawong had a loan with the bank at its Riverwood Branch, and he would like to move the account closer to his office in the city, and that Illawong was looking to re-finance the existing loan which was due to mature in April. The bank officer told him that all business loans had been taken away from the branches and were now being dealt with at Oxford Street Darlinghurst. The bank officer gave him the name of Paul Morrison as the person to see there.

72 Mr Alcock then prepared a collection of documents for the purpose of making application for an extension of the term, and increase in the amount of the loan. The documents included balance sheets, asset and liability statements of directors, a valuation, tenancy schedules, and demographic data for the area around the shopping centre.

73 On 7 May 1991 Mr Alcock met with Mr Morrison, at the BBC Whitlam Square. Mr Alcock handed him a letter of application for a $10m loan. This letter was in the same form as an application letter which Mr Alcock sent on 7 May 1991 to other financial institutions, namely Advance Bank, National Australia Bank, and Wespac. These letters explained that the $10m was required to repay the borrowings from State Bank and St George, and provide Illawong with a reserve of funds.

74 Mr Morrison was assisted, at BBC Whitlam Square, by Michael Stephens. Mr Stephens telephoned Brent Scotten, at BBC Hurstville, on 9 May 1991. Mr Scotten’s file note reads:

“Mike Stevens, Manager BBC City & Eastern Suburbs rang to advise that Barry Alcock of Illawong Village had approached him for a loan of $10.0m to repay existing $7.75m with SBN, repay $1.5m to St George and provide $750 000 to renovate the “Village”.

Mike said Barry had originally approached CAFID who had referred him to the BBC. Mike stated that Barry indicated he had talked to John O’Neill & that Barry had a client who banked SBN (CAFID) & had a net worth of $0.5bn. Barry stated he would use this as leverage.

Mike went on to say that Barry “slagged” Riverwood branch manager, Metro South Regional Manager & the BBC.

I advised Mike of the problems encountered some 12 months ago with this relationship & have sent him copies of our submissions held on file.

Given the leverage that Barry Alcock is endeavouring to use combined with the fact that he talks disparagingly about all the SBN staff he has met & dealt with to date it would appear that the proposal is unlikely to stand on its merits & that client may be a little “desperate”.

Mike intends to ring Riverwood Branch & talk to Errol Rowland and Jon Gillingham regarding present position of existing facilities.”

“SBN”

“problems encountered some 12 months ago with this relationship”

“… administration of this relationship is exceedingly difficult. They are overly demanding and antagonistic in the approach towards SBN. They expressed a desire to bank elsewhere come maturity of facilities in April 1991. It is apparent that this relationship is over and we merely transact.”

State Bank’s Initial Reaction to Expiry of Loan Term

75 By May 1991 Mr White had moved from his home in the suburb of Illawong to Brisbane, where he operated a newsagency. On 2 May 1991 Mr Rowland had written to the Secretary of Illawong, at the address of Mr White’s former residence, saying:

“Kindly note that your Fixed Rate Term Loan for $7.750 million expired 8/4/91.

We should be pleased to learn of your intentions/ requirements in this matter.”

“He sent me this and he is a pretty bombastic sort of guy and he probably would have shouted over the phone to me ‘You better attend to this. I’ve enough problems down here.’”

76 On 3 June 1991 Mr Stephens prepared an office minute, which recorded the various accounts which Illawong and associated people and companies had with State Bank, asset values of Illawong, and a précis of the actual profit and loss account for the year ended 30 June 1990 (which showed a loss of a little short of $215,000) and estimated profit and loss accounts for years ended 30 June 1991 and 1992 (which showed profits of the order of $135,000 and $291,000 respectively). In commenting on Illawong’s application to borrow $10m, the minute said:

“The problems we face are two fold:-

1. SBN Valuer has confirmed that value of centre has not increased since the last valuation in December 1989. Refer valuers comments.

The shortfall in loanable sum is $1.6M if additional funds are advanced. Director (Alcock) was advised that SBN requires additional first class security if increased funding is to be considered. Statement of assets and liabilities for directors is attached.

2. Repayment capacity is only marginal at increased borrowing level.

Mr Alcock was advised that SBN was comfortable with the present exposure and that we did not want to increase our exposure unless additional security was given. Also a close look would have to be taken at the income from the centre to confirm same.”

“Mr Alcock was advised that SBN was comfortable with the present exposure and that we did not want to increase our exposure unless additional security was given”

77 That office minute was submitted to the Senior Manager of the BBC for the Central Sydney Region on 3 June 1991, who noted on it “should we wish to proceed further, it would be on the basis of supported guarantees of directors (real estate) and critical look at cash flow bearing in mind projecting increase in rents in a negative growth period.” On 4 June 1991 the Credit Administrator, Central Sydney Region noted the document with the words “Why are we looking at Riverwood customer”.

78 On 25 June 1991 Mr Eaton prepared a file note of his telephone conversation with Mr Rowland. His note included:

“I advised Errol Rowland regarding the current status on Illawong Village. I advised Errol that City/Eastern Suburbs BBC had been talking to Alcock and reviewing a proposal to refinance the existing Bank loan, the St George Building Society second mortgage and provide some working capital. A position paper had been done by one of the BBC staff that had been put to the Credit Administrator who had asked why they had been dealing with this account as it was domiciled in this region. I advised Errol that they had indicated to Alcock that the Bank couldn’t provide this facility without additional security and more information regarding serviceability, particularly with regards to the large projected increase in rental income. Alcock had also been advised that he had to deal from here on in with this region.”

Threat of Penalty Interest Made, Then Retracted

79 Meanwhile, on 20 June 1991 Mr Rowland had sent another letter to the Secretary of Illawong, also addressed to the address of Mr White’s former residence. It said:

“As previously advised in our letter 2 May 1991, your Fixed Rate Term Loan for $7.750 million expired 8 April 1991.

This facility will now need to either be repaid in full or re-negotiated within the next 14 days, otherwise the bank will have no alternative other than to proceed with “call up” of the advance.

In the interim a penalty interest rate of 20-25% will apply.”

80 That letter likewise was forwarded to Mr White in Brisbane. On 8 July 1991 he faxed a copy of it to Mr Alcock. He also telephoned Mr Alcock about it – a telephone call concerning which Mr Alcock said, “discussion would not be an appropriate word”, and “I would have received a tirade”.

81 Mr Alcock immediately on receipt of that fax, wrote a letter to Mr Stephens, of the State Bank at Whitlam Square, referring to his application for funds of 7 May 1991 and subsequent telephone conversations. He continued:

“You indicated that the bank was comfortable with its present loan position and would prefer not to lend any more. I advised that I was seeking funds from other sources so that I could merge the first mortgage and the second mortgage and would advise on the progress.

I am currently awaiting decisions from those sources which I expect this week.

TODAY

Would you please advise Mr Rowland that we are in the process of re-negotiating and that there is no need for the type of letter written by him.”

82 Mr Stephens replied to Mr Alcock on 10 July 1991 saying:

“I refer to your letter of 7 July 1991. This matter is now being handled by the Manager, Riverwood Branch in conjunction with Business Banking Centre, Hurstville.

Please note that the facility expired on 8 April 1991 and the consequences of not remedying the problem as outlined in the Manager’s letter of 20 June 1991.”

“7.7.91”

83 Mr Rowland recalls receiving a telephone call from Mr White, in which Mr White told him that Illawong was dealing with Paul Morrison of the bank in relation to re-negotiation, and that Mr Rowland should confirm this with Paul Morrison. Mr White gave Mr Rowland the telephone number of Paul Morrison. Mr White also asked State Bank to waive the penalty interest. Mr White was abusive about State Bank’s imposition of penalty interest. Mr Rowland’s evidence that this telephone call took place on either 8 July or 9 July 1991 fits in with the objective evidence.

· It was on 8 July 1991 that Mr White faxed to Mr Alcock the State Bank’s letter of 20 June 1991.

· On the facsimile copy, which Mr Alcock sent to Mr Rowland on 8 July 1991 of the letter which Mr Rowland wrote to Mr Stephens on 8 July 1991, Mr Rowland made a note saying “Paul Morrison – renegotiation – ring Greg White” followed by Mr White’s Brisbane telephone number, and another note of the telephone number of Mr Morrison.

· A file note dated 9 July 1991 of Mr Scotten records “Errol advised he had been abused by Greg White (called from QLD) for the letter he had sent”.

· As well, the topic of the loan having expired, and penalty interest being charged is one likely to cause Mr White to react promptly.

84 On 12 July 1991 Mr Rowland wrote to Illawong saying:

“We firstly apologise in forwarding our letters 2 May 1991, and 20 June 1991, to an incorrect address.

Furthermore, we acknowledge that this action has led to a communication break-down. As a result, additional time will be allowed to enable this matter to be satisfactorily resolved.

As advised by Michael Stephens, in his letter 10 July 1991, from The Business Banking Centre, Whitlam Square, this matter is now to be handled by this Branch in conjunction with our local Business Centre Hurstville. …

Please note we do not have any formal proposal for consideration currently before us.

Your letter 8 July 1991, to Michael Stephens, stated that you were awaiting decisions from other sources, and we should now be pleased to learn of the results as soon as possible.”

85 At some stage in the period 8 to 12 July 1991 Mr White caused his solicitors, the Brisbane office of Freehill Hollingdale & Page, to make a complaint to the Managing Director of State Bank, concerning the intention Mr White believed State Bank had to charge a penalty interest rate of 25%.

86 A memorandum of Mr Rowland to Mr Eaton dated 16 July 1991 records, “Up until now, customers were/are of the opinion that a proposal was being processed/considered by BBC Whitlam Square. They also want penalty interest to be waived”.

87 A note which Mr Rowland made on 6 August 1991 records:

“Owen Eaton – BBC has appointment with Barry Alcock, Monday 12/8. NB penalty interest to be waived – previous rate to apply.”

88 By 8 August 1991 Michael Stephens had advised Brent Scotten that he could not find all the information which Mr Alcock had given to BBC Whitlam Square enclosed in his application letter of 7 May 1991. Only some of the information referred to in that letter had been sent from BBC Whitlam Square to BBC Hurstville.

89 On 16 September 1991 Mr White sent a facsimile to Mr Rowland, saying:

“I refer to your letters dated the 20th June and the 12th July 1991 and our subsequent telephone conversation and confirm that the bank has agreed not to apply penalty interest on the loan to Illawong Village Pty Ltd which it is currently re-negotiating with the company.”

90 The version of that facsimile which is in evidence bears a facsimile imprint showing that it was sent on October 3 1991 from Mr White’s Queensland newsagency. The facsimile bears the original of a bank “received”, showing that the facsimile was received at the BBC Hurstville on 4 October 1991. The facsimile bears writing on it “Attention Mr Gillingham MGR BBC Hurstville”, and also has Mr Gillingham’s name in large block capital letters in handwriting. I would infer that by the time Mr White wrote the original of that letter, responsibility for the file had been transferred from the Riverwood branch to the BBC in Hurstville, and that the content of the facsimile (whether the original or a further facsimile copy of it does not matter) only came to Mr Gillingham’s attention at the BBC Hurstville in early October. This fits in with the note dated 10 October 1991, recording the amendment of the rate of the facility to 13.97% (para [92] below).

91 On 8 October 1991 Mr Fitzpatrick (who by this time had become the manager responsible for Illawong’s account at BBC Hurstville) wrote to Illawong advising it that administration of its accounts was being transferred to BBC at Hurstville.

92 A note of a bank officer, probably Mr Gillingham, appears on the same page as the note of Mr Rowland referred to in para [87] above. It is dated (using some Roman numerals) 10 October 1991. It records “Rate ammended [sic] to 13.97%”.

November 1991 to March 1992

93 On 6 November 1991 Mr Eaton, the Manager of the BBC at Hurstville, wrote to Mr Alcock saying:

“Further to our meeting on 23 October 1991 and our telephone conversation today I confirm that we will require the following in order … to complete a review of the matured loan facility for Illawong Village Pty Limited …”

94 On 10 December 1991 State Bank wrote to Illawong saying:

“We refer to our letter of 6 November 1991 and subsequent discussions, and note with concern that the information requested has not been received nor has the interest payment due as at 30 September 1991 been satisfied.

Unless these matters are rectified to the satisfaction of the Bank prior to 31 December 1991 we may have to consider taking legal action for recovery of the debt.”

95 That letter enclosed a letter dated 9 December 1991 from State Bank to Freehill Hollingdale and Page Queensland, solicitors for Mr White, who had requested in early October 1991 that Mr White’s guarantee of the debts of Illawong be released. That letter said:

“We advise that ILLAWONG… is in default of its arrangements with the Bank and as such the request to release Mr White’s guarantee from the Bank’s securities has been refused.”

96 Illawong provided some further information to Mr Fitzpatrick of State Bank by letter dated 18 December 1991. Mr Fitzpatrick received that letter on the same day as he received another letter from Mr Alcock dated 20 December 1991, which Mr Alcock opened by saying:

“Further to our discussions about the calculation of our interest charges and the frustrations I have expressed to you about the past performance of the bank, I have gone right back through all my files and bank statements.”

97 The letter set out three pages of complaints against the bank before turning to the question of interest. There then followed one page and a half of complaints about the way in which the bank had dealt with interest. These complaints related to the date when debits were made, and alleged inconsistencies or lack of explanation concerning particular debits. Particular complaints were made about debits of interest in October and November 1990, and January, April and July 1991. A theme of the complaints concerning January, April and July 1991 was that the Bank had, without explanation, departed from the practice it had followed since inception of the loan concerning charging of interest. Relevantly for present purposes, no complaint was made at that time that the bank was not entitled to charge at the same rate of interest it had been charging since inception of the loan. A complaint was made about a particular charge of interest which had been made on 1 October 1991, of over $328,000, which was considerably higher than interest charges which had previously been made. The letter concluded with complaining about certain debt administration fees alleged to have been improperly charged, totalling a little over $8,200. It concluded:

“All in all, it seems we have been overcharged well in excess of $100,000 and so I will hand you the can of worms to see what you can come up with.”

98 The question of the rate of interest which the bank had been charging was mentioned in the letter dated 18 December 1991, but not in a context of saying that State Bank was not entitled to charge 13.97%. One place where the rate of interest charged was mentioned was in explaining the 1991 accounts – Mr Alcock said that in that year “we paid interest of $1,456,000 which is $335,000 more than we would need to pay if we are granted a first mortgage for $9,750,000 (an increase of $500,000) at today’s rates.” Later in the letter, Mr Alcock pointed out that the amount of interest which would be paid on a loan of $9.75m, at current market rates, was less than the amount of interest which Illawong was paying to State Bank and St George combined, for loans totalling $9.25m. This was pointed to as a reason why Illawong was having a cash flow problem, and a reason why it would be appropriate for State Bank to lend Illawong $9.75m.

99 A memorandum of Mr Fitzpatrick’s of 13 January 1992 records the then attitude of State Bank to the Illawong facility:

“We are currently reviewing the account to determine if we will assist in full or part with the above request or if we will call-up our securities in relation to the existing expired advance.”

100 On 26 February 1992 Mr Fitzpatrick requested an assistant to manually recast the account for the term loan, on the basis of interest being charged at 13.97% per annum charged quarterly on the last day of each financial quarter whilst the account is in order, interest being charged at 14.97% per annum charged quarterly on the last day of each quarter whilst the account was out of order, and a debt administration fee being charged quarterly at 0.2% per annum to the greater of the principal amount ($7.75 million) or principal plus arrears if that amount exceeded $7.75 million.

101 On 26 February 1992 Mr Fitzpatrick wrote to Illawong, stating that the Bank was not prepared to advance the amount required to discharge the second mortgage debt on the property, and that the Bank was not prepared to consider lending an additional $300,000 for capital works until the position regarding the existing advance was resolved. The letter noted that the current position of the fixed rate term loan was “balance $8,114,022.55 debit; expired 8/4/1991.” The letter said:

“It is noted with concern that the only attempt made to adjust the interest arrears during this calendar year is the $50,000 received 11 February, despite your statements that the debt can be serviced. Your request to refinance the existing expired loan of $7,750,000 plus partial capitalisation of arrears is currently being considered, however cannot receive favourable consideration while only nominal attempts are being made to service the debt. Immediate adjustments of the interest arrears is now required.”

“The contents of this letter should not be construed as an indication that your request for extension of the current facilities in default will be approved, merely that the request is being considered. The contents of your letter dated 20 December 1991 are currently being investigated and we will advise you of the results as soon as we can.”

102 On 4 March 1992 Mr Alcock and Mr Davis met Mr Fitzpatrick and another bank officer. Mr Fitzpatrick recorded their request for finance made that day as follows:

(1) Extend existing finance facility (expired)	$7,750,000
(2) Capitalise arrears & costs	$350,000
(3) Fitout of change over shop uses	$150,000
(4) Refinance St George second Mtge	$1,500,000
$9,750,000

“Alcock & Davis were advised that it was extremely doubtful that SBN would be prepared to take out St George in the current climate, & if extension & capitalisation of arrears & fit out costs were approved would be on the basis of bank bills at a margin of 2.25% to 2.5% on 12 month basis only.

Then requested 3 yrs [fixed rate term loan] – no – interest rate protection may be made available if they purchase a cap.

If we approve the $8.25m (excluding St George) our priority will only cover us for $8.0m – customers to be advised that:-

(a) St George priority will need to be raised or

(b) St George may have to increase their debt to $1.75m (doubtful) or

(c) Additional security will be required.”

103 On 13 March 1992 Mr Fitzpatrick and Mr Alcock met. I will discuss that meeting in more detail in para [227] below.

104 Within one or two business days after that meeting Mr Fitzpatrick wrote a note to his assistant, Mrs Jan Fahy saying:

“Jan, just spot check – customer will drop claim & accept what’s been charged – but please check for me how October ’91 int was assessed by computer – appears way too high.”

105 On 31 March 1992 Mr Alcock sent Mr Fitzpatrick the information he had requested.

Mr Fitzpatrick’s Proposal of 7 April 1992

106 On 7 April 1992 Mr Fitzpatrick submitted, to those above him in State Bank, a proposal for financial facilities for the Illawong group. He recommended that approval be given to restructure and increase facilities, so that there was a fixed rate term loan of $8.25 m for 12 months at a margin of 2.25% per annum above the Bank’s base lending rate, a bank bill facility of $100,000 for 12 months, and an overdraft of $50,000. One of the recommended conditions precedent was a new formal Deed of Priority between State Bank and St George fixing State Bank’s priority at $8.5 m plus interest costs and charges. Another condition precedent was the registration of leases over two identified shops. A negative pledge was also to be required from Illawong. Mr Fitzpatrick recommended that overcharged interest of $32,117 be refunded to the customer’s account upon acceptance of offer. This amount of $32,117 was an amount which had emerged from the manual recasting of the account which Mr Fitzpatrick had asked to be carried out.

107 In his commentary on the proposal, Mr Fitzpatrick wrote:

“The company’s facilities expired 4/91 … and since that time they have been seeking to have [State Bank] not only extend the expired facility but also to take out the expired second mortgage of $1.5m to St George … Delays have occurred in processing this request due to file papers being lost at BBC Whitlam Square, substantial volume of outstanding reviews acquired by BBC following restructure, staff absences due to the Bank’s leave policy and delays in obtaining further information from customer to complete the review. Delays were also incurred in having to totally reconstruct the loan and trading account facilities following claim against the Bank (since dropped) in December 1991 for overcharged interest – discussed at annexure C.”

108 In annexure C to the proposal Mr Fitzpatrick set out the history of the matter, including that “Branch Manager agreed to cease charging penalty interest.” He continued:

“In December 1991 customer lodged a claim against the Bank for overcharged interest of approx. $100,000 and accounts were totally reconstructed by BBC for the period 4/88 to 12/91 to check the validity of the claim. The reconciliation has revealed that, depending upon which interpretation the Courts give to the documents, we have either overcharged customers by $79,000 or undercharged them by $269,000. Having examined all Bank statements and correspondence for the period it is the writer’s opinion that this matter should not be allowed to proceed to court as the Bank has failed to honour the loan contract on several occasions. It is considered that an acceptable return has been achieved on the facility given the “penalty rates” applied for the past 10 months whilst various proposals have been considered by not restructuring facilities at current interest rates, and attempting to collect the possible undercharged interest will only further impact upon customer’s ability to service proposed commitments.

240 There is also some evidence of a general kind about the Bank’s attitude to charging of interest while the Limbo Period was running. Mr Alcock said, in cross-examination,

“A. … I'll concede that every time the question arose, as in Owen's letters to me, the theme was, you know - You're going to cop the 13.97 percent.

“From all my recollections of the meetings is that I was firm on the fact that the rate was 13.97%.”

241 There is no inherent improbability in a hypothesis that Illawong, having succeeded in having the threat of imposition of penalty interest withdrawn, having then met with insistence during Mr Eaton’s period that 13.97% was the rate which would be charged, and having negotiated as hard as it could with Mr Williams, Mr Peden, and Mr Footit for a further reduction in interest rate, came to accept, at the time the new facility was put in place, that it had obtained all the concessions it was going to obtain. It is not an inherently unlikely hypothesis that, in the period of settlement of the new facility to 21 September 1993, its concern was to ensure that it actually received the additional concession which had been negotiated with Mr Footit. I make these observations in terms of what is not an implausible hypothesis, because it is Illawong which bears the onus of proof of absence of agreement on an interest rate.

242 In all these circumstances I am not persuaded that there was no agreement concerning the interest rate to be charged to the account.

Applicability of Clause 3.3 of the Memorandum

243 State Bank contends that even if, contrary to its principal submission, the 29 June 1990 Mortgages and the Memorandum contained the relevant contractual provisions concerning payment of interest, it would be Clause 3.3 of the Memorandum which set the interest rate. Clause 3.3 entitled the Bank, in the circumstances where Clause 3.3 applies, to charge a rate which was “the highest of the prevailing interest rates payable on the moneys hereby secured from time to time” plus 2% per annum. The “moneys hereby secured from time to time” included Illawong’s unarranged overdraft, and its lease accounts. The interest rate charged on those accounts exceeded 13.97% per annum. No attack was made on the validity of Clause 3.3 of the Memorandum. Thus, if Clause 3.3 applies, State Bank was entitled to charge more interest during the Limbo Period than it in fact charged.

244 Two questions arise concerning the application of Clause 3.3 of the Memorandum. The first concerns the meaning of “due” in the opening words of Clause 3.3, “in respect of moneys not paid on their due date”. In Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, at 8, Gibbs CJ said;

“The word “due” is ambiguous; it can mean owing, although not payable until some future date, or it can mean presently payable. The meaning of the word must be determined by the context.”

Clyne

Ex Parte Kemp Re Fastnedge

Bankruptcy Act 1966

“due”

In Re Newark Pty Ltd (in liq); Taylor v Carroll

Pioneer Concrete (Vic) Pty Ltd v Stule

Sutherland v Sunshine Clothing (Aust) Pty Ltd

Olifent v Emwest Products Pty Ltd

“due”

Corporations Law

3M Australia Pty Ltd v Kemish

Re New World Alliance Pty Ltd (Rec & Mgr Apptd); Sycotex Pty Ltd v Baseler

245 In Clause 3.3 of the Memorandum, moneys are “not paid on their due date” when they are not only due, but are payable, and have not been paid. The commercial point of Clause 3.3 is to make provision for payment of interest in circumstances where a borrower is in default. There is no default until such time as money has become not only due, but payable.

246 The second matter which needs to be decided concerning Clause 3.3 is whether, before the term loan which was advanced on 8 April 1988 became payable, it was necessary not only for three years to have expired from the date of advance, but also for State Bank to have made a demand.

247 In In Re McHenry; McDermott v Boyd; Barker’s Claim [1894] 3 Ch 290 the Court of Appeal considered a loan concerning which the borrower had signed a document describing it as “repayable with interest” on a particular date in the future. The Court held that a limitation period started running as soon as that date had passed. Thus, in that case no demand was necessary before the money become payable. Further, Lindley LJ, at 294 held that, even though there was no express statement whereby the borrower promised to pay on that date, the loan was indeed repayable on that date.

248 Chitty on Contracts, 17th edition, para 36-211 says:

“A loan may be made for a specified period (a term loan). In such a case repayment is due at the end of the specified period and, in the absence of any express provision or implication to the contrary, no further demand for repayment is necessary.”

Law of Mortgage,

“As soon as the mortgagor has made default … in payment of the mortgage debt … - that is, where a time for payment is fixed, by non-payment on that day; or where no time is fixed, by non-payment on demand … or, where the mortgage so provides, as soon as there is some other breach of the terms thereof, the mortgagee is entitled to pursue any or all of his remedies against the debtor …” (citations omitted)

249 Illawong referred me to Pennington, Bank Finance for Companies (Sweet & Maxwell, 1987), at 12:

Buckingham & Co v London and Midland Bank Ltd

250 The Buckingham Case which Professor Pennington cites does not justify the proposition for which he cites it. The case concerned a manufacturer, who for many years had had a loan account and a current account with a banker. When the banker discovered that its securities were less valuable than it had thought, it closed both accounts. The action was described, at 70, as one “… to recover damages for a breach of duty in improperly closing his account, whereby he alleged he was injured in his business and credit.” The action was a trial with a jury, so the only scope for judicial exposition of the law was in the instructions to the jury. Those instructions contain no such legal statement as that for which Professor Pennington cites the case. The report concludes, at 72, by saying:

“The learned Judge left the following questions to the jury:-

1. Was it the course of dealing between the plaintiff and the defendants that the plaintiff was to be allowed to draw upon his open account without reference to his loan account?

2. If yes, then was the plaintiff entitled to a reasonable notice that that course of business would be discontinued?

3. Was such reasonable notice given?

The jury answered the first two in the affirmative and the last in the negative and assessed the damages at £500.”

251 In the present case, a reading of the provisions of the Facility Letter of 11 December 1987, which I have set out at para [7] above, leads to the conclusion that this loan is one which was repayable, without any demand being necessary, after three years. The fact that the parties contemplated that a review would be carried out prior to expiration of the facility, and that they contemplated that a possible outcome of such a review might be that the loan was refinanced, or that conditions for its repayment might be arrived at, does not detract, it seems to me, from the loan being due, within the meaning of the opening words of Clause 3.3 of the Memorandum, once the three year period had passed. This is because it is only in circumstances where there is a favourable outcome of that review that the loan would not be repayable at the end of the three-year period.

252 Illawong argued that there was nothing to stop the facility from continuing after the three-year period had expired. It is a common enough commercial practice for a financier to enter a “Facility Agreement” with a customer, under which the financier agrees that, on certain conditions, it will make available one or more types of financial accommodation. In the present case, the two types of financial accommodation which the Bank offered to make available by its letter of 11 December 1987, were a fixed interest term loan, and a commercial bill option. If, after the Facility Letter had been accepted by the customer, the Bank had refused to make available the term loan, or had required different conditions to those on which it promised to make the term loan available, or had refused to accept bills of exchange in the circumstances where it had promised, in the Facility Agreement, it would accept bills, Illawong could have sued the Bank on the contract arising from the Facility Letter. Once the Bank has made available to the customer the loan it has promised to make available, it is the terms of the contract of loan which govern the obligations of the customer to pay interest, and to repay. While some of the terms of that contract of loan might be written in the Facility Letter, it is not the contract to make available a facility which at that time governs the obligations of the customer to repay the loan, or to pay interest. Under the Facility Agreement in the present case, Illawong could have, during the term of the facility, repaid the principal sum in whole or part prior to maturity (on paying certain amounts of interest which the Facility Letter set out), and required the Bank to accept bills of exchange. If the Bank accepted those bills of exchange the Facility Letter made provision that, if Illawong wished, the Bank would arrange discounting of the bills. The Facility Letter made provision for the Bank to be able to debit Illawong’s operating account with the face value of any bill on the due date of any bill which the Bank had accepted. If that happened, it would be the terms of the contract governing Illawong’s operating account which would decide what interest would be charged on the amount so debited to the operating account, and in what circumstances the Bank could require that amount to be repaid. In ways like this, the Facility Agreement was one whereby the Bank conferred on Illawong the facility, or capacity, to require a variety of more particular financial transactions to be entered into. When the Facility Letter said that the “term of the facility is three years”, that means that it was during that period of three years that there was the capacity on Illawong to require the Bank to enter into financial transactions. Thus, for example, once the three years had expired, Illawong had no contractual right arising from the Facility Letter to require the Bank to accept commercial bills.

253 For these reasons, I do not accept Illawong’s submission that the facility continued beyond three years.

254 The Facility Letter is one which is unlikely to be adopted by bankers as a precedent. It does not make express provision for when the term loan, which is one of the facilities it offers to make available, will be repayable. It is quite clear, however, from the wording of the Facility Letter that the loan which was intended, was one which was a “fixed interest term loan”. It would be bending language too much to say that that expression meant that what was being offered was a loan, of indeterminate duration, the interest of which was fixed for a term. A more ordinary meaning of the expression, and the way in which commercial people would understand it, is that the loan itself was one for a term. When the interest is fixed for a term of three years, and the facility under which the loan is granted is one which lasts for three years, it seems to me that the correct construction of the Facility Letter is that the loan itself will be for a term of three years.

255 Some submissions were made by the Bank, about whether the failure of the Bank to conduct such a review prior to the expiry of the three year period arose from circumstances in which Illawong, by not presenting to it any material to enable the Bank to conduct a review, had waived any entitlement to such a review. The Bank made submissions to the effect that Illawong had such an obligation, that it was in breach of that obligation, and hence could not benefit from a failure of the Bank to conduct a review, when that failure had been caused or contributed to by Illawong’s failure to request a review or provide any material by reference to which it could be conducted: Alghussein Establishment v Eton College [1988] 1 WLR 587 at 591-594; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 at 34; New Zealand Shipping Co Limited v Société Des Ateliers et Chantiers de France [1919] 1 AC 1. Those submissions of the Bank do not relate to any issue raised by the pleadings. Though the Statement of Claim as originally filed made complaint about the Bank not conducting a review within the three years of the facility, that portion of the Statement of Claim was struck out, and the topic did not reappear in the pleadings in any other legal guise. Hence I will give no further consideration to these particular submissions of the Bank.

256 The effect of Clause 3.3 being applicable is that, even if the 29 June 1990 Mortgages governed the obligation of Illawong to pay interest, the Bank has not charged more than it is entitled to charge during the Limbo Period.

Applicability of Clause 2.1.4

257 The Bank has a subsidiary argument, in the event that it was the Memorandum which governed the payment of interest. That argument is that for much (or perhaps all) of the Limbo Period Illawong did not pay interest on the due date. Clause 2.1.4 of the Memorandum entitles the Bank to charge interest on those amounts of unpaid interest “at the rate or rates hereinafter provided for moneys not paid on the due date” – ie, at the rate which Clause 3.3 permits. If I were mistaken in concluding that the whole of the $7.75m had become due at the start of the Limbo Period, Clause 2.1.4 would permit State Bank to charge interest on late paid interest, in the manner of the Bank’s submission which I have just stated.

The Allegation that State Bank Should have Lent at its Cost of Funds

258 There is no basis for Illawong’s assertion that State Bank was obliged to lend to it at cost of funds. The rate which the Bank agreed to for the three years of the fixed term loan, from April 1988 to April 1991, was cost of funds plus one percent, but there was no obligation on the Bank to charge a rate, after that first three year period, by reference to the cost of funds. There were no customers of the Bank whose facilities had expired and who were offered funds for a variable period at an interest rate that was just the Bank’s costs of funds. Though Mr Whitehead gave evidence in chief to the effect that, during his time with the Bank, there was an account in respect of which a variable rate equivalent of cost of funds was charged, in cross-examination he agreed that that evidence was incorrect.

259 There is no basis in the documentation which has been tendered for inferring that the Bank ever charged a rate of interest, for a loan which was not of fixed length, which either was, or was based upon, the cost of funds. The proposition that the Bank ever charged a rate, for a loan which was not of fixed length, which was, or was based on, its cost of funds was not put in cross-examination to any of the witnesses called by the Bank.

260 Various of the offers which State Bank made to Illawong during the Limbo Period, and which Illawong did not accept, were for lending for a term, at a rate considerably less than the rate which State Bank was charging on the expired fixed term loan. It could not be said that those rates provide an indication of the rates which State Bank would have applied, if it had turned its mind to the question of what were “like accounts” to Illawong’s. First, those rates were for a fixed period loan, when Illawong’s loan, at that time, was not a fixed loan. A contract to pay a particular rate of interest for a fixed period is one which involves the borrower undertaking the risk that market rates might move up during the fixed period. That is a most material difference from the situation of Illawong’s loan, which it could have repaid when it chose, if it had the money. Further, the offers which State Bank made were subject to conditions, concerning changes in the St George priority, concerning registration of certain leases, and concerning the granting of a negative pledge, which had not been complied with. Illawong cannot say that it was entitled to receive the same rate that it would have received if conditions were complied with, in circumstances where it did not comply with those conditions.

Accord and Satisfaction

261 State Bank alleges that the circumstances of the granting of the interest concessions of $90,192, $144,318.26 and $3,156.18 in July and September 1993 give rise to an accord and satisfaction of any claim which Illawong has to have overpaid interest in the Limbo Period.

262 Accord and satisfaction is a common law doctrine. It provides the means whereby a cause of action which a plaintiff has can be rendered unenforceable. In McDermott v Black (1940) 63 CLR 161, at 183-185 Dixon J (with whom Rich and McTiernan JJ agreed) said:

“The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted, the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one … of accord and satisfaction there are two cases, one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement. The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.”

263 As is apparent from Dixon J’s statement that “an accord executory neither extinguishes the old cause of action nor affords a new one”, the accord need not be contractual. It can take the form “I agree with you that if you do X I will release my cause of action”, where there is no obligation on the “you” to do X. However there is no requirement that the accord not be contractual – in some cases, it might be contractual. And there can be different types of contract involved. Thus Phillips JA (with whom Winneke P and Charles JA agreed) said, in Osborn v McDermott [1998] 3 VR 1, at 10,

“Thus, there are three possibilities, not two. First, there is the mere accord executory which on the authorities, does not constitute a contract and which is altogether unenforceable, giving rise to no new rights and obligations pending performance and under which, when there is performance (but only when there is performance), the plaintiff’s existing cause of action is discharged. Secondly, at the other end of the scale is the accord and satisfaction, under which there is an immediate and enforceable agreement once the compromise is agreed upon, the parties agreeing that the plaintiff takes in satisfaction of his existing claim against the defendant the new promise by the defendant in substitution for any existing obligation. Somewhere between the two, there is the accord and conditional satisfaction, which exists when the compromise amounts to an existing and enforceable agreement between the parties for performance according to its tenor but which does not operate to discharge any existing cause of action unless and until there has been performance.”

264 To succeed in establishing an accord and satisfaction, the Bank needs to establish that Illawong agreed to give up its claim that it had been overcharged interest, in return for something which the Bank gave it. I am not satisfied that the dealings between Illawong and the Bank should be so characterised. I am satisfied that the Bank understood the credit of $90,142 as being an amount which needed to be refunded if interest were to end up having been charged at 13.97% over the whole period from 8 April 1991 to 26 July 1993. I am also satisfied that the further credit of $144,318.26 is one which the Bank calculated so as to further reduce the interest rate charge to Reference Rate plus 2%, as from 1 December 1992. The additional credit of $3,156.18 was a refunding of interest which had been charged on the overdraft account, arising from the Bank having debited interest which, by allowing the refund of $144,318.26, it refunded. I would also accept that Illawong acted in a way consistent with how it would have acted if the giving of those credits meant that it had no more claims for overpaid interest. At the meeting on 21 September 1993 (which each of Mr Alcock, Mr Davis, and Mrs Davis attended) there were discussions about the interest arrears, and ways in which those arrears could be reduced. Further, there was no further complaint about the interest which had been charged in the 1991-1993 period until 1996. Notwithstanding all that, there is no evidence that the topic of actually giving up the claim that too much interest had been charged during the Limbo Period was raised. Mr Footit was not called (on a basis which I will soon mention). The evidence is in a state where it is possible that there was an agreement for Illawong to give up its claim, but I am not persuaded that there actually was such an agreement. Accordingly the defence of accord and satisfaction fails.

265 There is no inconsistency between my finding that the Bank’s defence of accord and satisfaction fails, and my finding that Illawong has not established that there was no agreement as to rates. Rather, those two findings illustrate the elementary proposition that where evidence is inadequate, whoever bears an onus of proof may well fail.

266 There is one evidentiary matter which I should mention, lest this case go further. In an affidavit sworn on 31 October 2003 Mr Alcock gave evidence as follows:

“Shortly before settlement of the plaintiff’s refinance with the defendant on July 26, 1993, I recall a phone conversation with Mr Footit in words to the following effect – “

FOOTIT: “We are getting close to settlement on the refinance. There will be credits to the company for $90,000 which you know about and a further amount of about $120,000. I have done a calculation but I have to check it yet, for a reduction of interest from January 1993 until now, to fall into line with St George.”

ALCOCK: “Don’t forget the company’s claim that it has been overcharged since April 1991, because the bank should have charged short term rates. Steve, you still have not given me an answer on the rate in the period since April 1991.”

FOOTIT: “I don’t want to hear about that now I will deal with that later.”

267 I do not accept that there was a conversation of the type there set out. Though Mr Footit did not give evidence, it was on the agreed basis that he had no recollection one way or the other about any such conversation having occurred. When the conversation was so long ago, when there is no contemporaneous documentary confirmation of its having occurred, when there was no raising by Mr Alcock of any claim concerning interest charged in the Limbo Period until after he enlisted Mr Whitehead’s help in 1996, and when Mr Alcock’s evidence in some other instances has been shown to be unreliable, I would not regard that evidence (and oral evidence from Mr Alcock which was sometimes to the same effect) as sufficient to discharge an onus of proof.

The Allegation that State Bank Failed to Determine a Rate Applicable to Like Accounts

268 From its starting point that it is the 26 June 1990 Mortgages which govern the payment of interest, Illawong then argues that the duty of co-operation implied in every contract (Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606-7), and the obligation on a contracting party to act so as not to prevent the other party from fulfilling its obligations (Meehan v Jones (1982) 149 CLR 571 at 591) and the duty of good faith in contractual performance (Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349) all required the Bank, once the period for which the interest was fixed had ceased, to turn its mind to the question of what were “like accounts” to Illawong’s, and apply to Illawong’s account the same rate of interest as it found it was applying to those “like accounts”. If (contrary to my view) the 29 June 1990 Mortgages governed the payment of interest, and if (contrary to my view) Clause 3.3 of the Memorandum did not, in the circumstances, prevent the application of Clause 2.1.3 of the Memorandum, and hence of the definition of “interest rate” in the Memorandum, I would accept that the implication for which Illawong contends applies. Further, the way in which the Bank went about fixing a rate to charge Illawong in the Limbo Period did not involve, at least at first, a search for “like accounts”. By the time of Mr Eaton’s memorandum to Mr Whitehead of 30 October 1992 consideration was being given to the question of how loans in a similar position to that of Illawong were treated. I shall assume, without deciding, that over the period 8 April 1991 to 26 July 1993 the Bank was in continuous breach of that obligation.

269 On that assumption, Illawong has not proved that it has suffered any loss in consequence. No plausible contention has been put forward that a “like account” to Illawong’s should be described as anything other than an expired fixed rate term loan. For loans of that type, the Bank had two different practices – the first to continue them at the previous interest rate until repaid, the second to adjust the interest rate to Reference Rate plus a margin in the range of 2% to 6%. If the first of those practices had been applied to Illawong during the whole of the Limbo Period, Illawong would have ended up paying more interest, during that period, than it in fact paid. If the second practice had been applied to Illawong during the whole of the Limbo Period, Illawong would likewise have ended up paying more than it in fact paid. It was only after 14 February 1992 that a Reference Rate plus 2% was less than 13.97%. On 8 April 1991 Reference Rate plus 2% was as high as 17.5%. In consequence of being allowed the credit of $144,318.26, Illawong had, in effect, been paying Reference Rate plus 2% since 1 December 1992.

The Estoppels in the Reply

270 In its Reply Illawong alleges a series of representations by State Bank, over a period from 23 October 1991 to 19 October 1996. While the detail of the representations vary, their general theme is the same, namely that any claim by the plaintiff for overcharging of interest would be dealt with at the time of refinance or repayment of the money borrowed. One use to which the estoppel is sought to be put is to preclude State Bank from relying on its defence of accord and satisfaction. As I have not upheld that defence, the estoppels do not need to be called on to carry out that task.

271 I accept that there were some occasions, in the period 1992 and 1993, when bank officers told Mr Alcock that they would deal with his claim for overcharging interest when the loan was refinanced. Those representations were carried out, by the Bank granting the three credits it granted in July and September 1993.

272 Before any estoppel by representation can take effect, the representation must be one which is clear and distinct: Legione v Hateley (1983) 152 CLR 406 at 435-437. A representation that a claim would be “dealt with” suffers intractable difficulties in complying with this requirement. The plaintiff seeks to overcome those difficulties by saying that the representation meant not only that the claim would be given consideration and either rejected or granted in whole or part, but also that it would be considered and dealt with in accordance with the proper contractual rights of Illawong. I do not accept that the representation should be so construed. However, even if it were so construed, Illawong cannot demonstrate that it has suffered any detriment, for precisely the same reasons that its contractual claim fails.

273 I do not accept that there were representations by bank officers in the period between 27 July 1993 and November/December 1995 to the effect that any claim for overcharging of interest in the period 8 April 1991 to 26 July 1993 would be dealt with on repayment of the money borrowed.

274 I accept that on 10 October 1996 Mr Whitehead and Mr Alcock met Mr Ward and Mr Williams, and complaint was made about overcharging by State Bank, and that one or other of the bank officers said that they would provide an answer within 10 days. I am not satisfied that that statement by the bank officers led Illawong to alter its behaviour in any way relevant to the claims in these proceedings at all.

275 In these circumstances, the various estoppel allegations do not assist Illawong.

Result

276 In light of these findings, the plaintiff’s claim will be dismissed.

277 The parties have agreed that questions of costs should be argued once the reasons for judgment on the substantial questions of liability have been delivered. In these circumstances the only order or direction which I now make is to direct that the parties bring in Short Minutes of Order to give effect to these reasons for judgment at a time arranged, within 10 Court sitting days from the date of delivery of these reasons for judgment, with my Associate. On that occasion any argument concerning costs can occur.

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Last Modified: 02/05/2004

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Illawong Village Pty Limited v State Bank of New South Wales [2004] NSWSC 18

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CITATION:	Illawong Village Pty Limited v State Bank of New South Wales [2004] NSWSC 18
HEARING DATE(S):	3/11/03 - 6/11/03, 10/11/03 - 13/11/03, 17/11/03 - 21/11/03, 24/11/03
JUDGMENT DATE:	4 February 2004
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Overcharging not established
CATCHWORDS:	CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - construction and interpretation of contracts - variation of terms of mortgage by terms of later mortgage securing same debt - WORDS AND PHRASES - "in default of" - EVIDENCE - burden of proof, presumptions, and weight and sufficiency of evidence - proof of a negative proposition - oral evidence concerning events long past - WORDS AND PHRASES - "due" - BANKING AND FINANCIAL INSTITUTIONS - banker and customer and business of banking generally - term loan - whether demand needed before loan is repayable at or after expiry of term - CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - discharge, breach and defences to action for breach - accord and satisfaction - elements of - BANKER AND CUSTOMER- factual findings relevant to whether customer had been overcharged interest
LEGISLATION CITED:	Limitation Act 1969 Bankruptcy Act 1966 (Cth) Real Property Act 1900
CASES CITED:	3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 Abrath v The North Eastern Railway Company (1883) 11 QBD 440 Abrath v The North Eastern Railway Company (1886) 11 App Cas 247 Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 Alghussein Establishment v Eton College [1988] 1 WLR 587 Allen v Tobias (1958) 98 CLR 367 Australian Municipal, Administrative, Clerical and Services Union v Greater Dandenong City Council [2000] FCA 1231; (2000) 101 IR 143 Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 Buckingham & Co v London and Midland Bank Ltd (1895) 12 TLR 70 Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 Crowley v Glissan (No.2) (1905) 2 CLR 744 Currie v Dempsey (1967) 69 SR (NSW) 116 Doe d. Dacre v Dacre (1798) 1 Bos&P 250; 126 ER 887 Greater Dandenong City Council v Australian Municipal, Administrative, Clerical and Services Union [2001] FCA 349; (2001) 112 FCR 232 Herron v McGregor (1986) 6 NSWLR 246 Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 IW v The City of Perth (1997) 191 CLR 1 Jones v Dunkel (1959) 101 CLR 298 Ex Parte Kemp Re Fastnedge (1874) LR 9 Ch App 383 Legione v Hateley (1983) 152 CLR 406 McDermott v Black (1940) 63 CLR 161 In Re McHenry; McDermott v Boyd; Barker's Claim [1894] 3 Ch 290 Meehan v Jones (1982) 149 CLR 571 New Zealand Shipping Co Limited v Société Des Ateliers et Chantiers de France [1919] 1 AC 1 Re New World Alliance Pty Ltd (Rec & Mgr Apptd); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 In Re Newark Pty Ltd (in liq); Taylor v Carroll (1991) 6 ACSR 255 Olifent v Emwest Products Pty Ltd (1996) 14 ACLC 24 The Ophelia (1916) 2 AC 206 Osborn v McDermott [1998] 3 VR 1 Pioneer Concrete (Vic) Pty Ltd v Stule (1996) 14 ACLC 534 Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Tallerman & Company Pty Limited v Nathan's Merchandise (Victoria) Pty Limited (1957) 98 CLR 93 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 Sutherland v Sunshine Clothing (Aust) Pty Ltd (1995) 13 ACLC 1,808 Watson v Foxman (1995) 49 NSWLR 315 Woolworths Ltd v Crotty (1942) 66 CLR 603
PARTIES :	Illawong Village Pty Limited - Plaintiff State Bank of New South Wales - Defendant
FILE NUMBER(S):	SC 3426/00
COUNSEL:	A J McQuillen - Plaintiff J E Marshall SC; G Lucarelli - Defendant
SOLICITORS:	McCoy, Grove & Atkinson - Plaintiff Minter Ellison - Defendant