Landsal P/L v Co-Operative Building Society of South Australia

[1992] FCA 641

t L

1. JUDGMENT No. .h%~.....J

IN THE FEDERAL COURT OF AUSTRALIA	)
)
SOUTH AUSTRALIAN DISTRICT REGISTRY )
1 PRINCIPAL
GENERAL DIVISION	) No.Gl80 of

B E T W E E N :

LANDSAL PTY. LTD. (IN LIOUIDATION, W.A. REID CONSTRUCTIONS PTY. LTD. 1 IN LIOUIDATION1, ANDREW THOUS ABRAHAM I REID FRANKLYN RICHAR D JOHN WHITE and KATHLEEN CAROL WHITE

Applicants

- and -

THE CO-OPERATIVE BUILDING SOCIETY OF

SOUTH AUSTRALIA

Respondent

FINDINGS OF FACT AND LAW

W: O'Loughlin	J.
31 Julv 1992

In these proceedings the five applicants have alleged that the RE1 Building Society ("the REI") engaged in misleading or deceptive conduct in late 1986 in contravention of the provisions of 8.52 of the Trade Practices Act 1974 (Cth) ("the Act"); they have also alleged that the conduct, or at least part of it, was fraudulent. It has been claimed that the impugned conduct "led all of the applicants to believe that the respondent had decided to advance" an amount of $140,000 by way of loan to the first named applicant, Landsal Pty. Ltd. (in liquidation) ("Landsal"). The applicants seek a declaration accordingly.

The other four applicants are W.A. Reid Constructions Pty. Ltd. (in liquidation) ("Reid Constructions"), Mr. A.T.A.

Reid, Mr. F.R.J. White and the latter's wife Mrs K.C. White. Messrs Reid and White were the only shareholders and directors of Landsal while Mr. Reid and his wife (who is not a party to these pr'oceedings) were the only directors and shareholders of Reid Constructions.

The two corporate applicants and Mr. and Mrs. White have claimed damages pursuant to 8.82 of the Act and Messrs Reid and White have sought, pursuant to 8.87, relief by way of the discharge of a guarantee that was executed by them in favour of the REI. In addition, the first four named applicants have claimed that the RE1 fraudulently misrepresented certain

.	matters to them: (paragraph 28.2 of the statement of claim). Even so, in the prayer for relief, only the two corporate applicants have claimed consequential damages; whether that was an oversight is not clear. Finally, the first named applicant, Landsal has claimed damages for breach of contract; other consequential relief was claimed but it is not necessary
However, on 1 September 1991, shortly before the commencement to set that out in detail. The original respondent in these proceedings was the REI.

of this trial, that Society was directed by the Minister,

pursuant to s.23(1) of the Buildina Societies Act 1975 (S.A. )

to amalgamate with another building society, The Co-operative Building Society of South Australia. A certificate of amalgamation issued on the same day and the liabilities of the

RE1 thereby became the liabilities of The Co-operative Building Society of South Australia. As a result of these circumstances, the actual respondent at the time of trial was, and for all subsequent purposes will be, the last-mentioned Society. However, in fairness to it and to its staff, it should be made clear that the complaints of the applicants in these proceedings were directed towards the RE1 exclusively.

During the pre-trial processes, it was agreed by the parties that it would be expeditious to proceed to the trial of certain limited issues, leaving for a later date questions of the quantification of damages if and when they should arise; it is for this reason that these remarks are described as "Findings of Fact and Law"; in due course the parties will be able to make their submissions on the further prosecution of these proceedings.

In 1985, Landsal owned vacant land on the Esplanade at obtained all relevant approvals necessary to build fourteen Seacliff, a seaside suburb of metropolitan Adelaide; it had

apartments and arrangements had been made that Reid Constructions would be engaged as the builder for the project. In December 1985, Landsal sought and obtained from the RE1 an

agreement to lend it $1.6M upon the security of a first mortgage over the subject land supported by guarantees from Messrs Reid and White. That sum was to be advanced by progress payments as work on the building of the fourteen

apartments proceeded; it was the amount that Messrs Reid and White had calculated as being necessary to pay out existing charges on the land and to meet construction and holding costs. Construction commenced and was well advanced when, in about August 1986, it was discovered that it would be

necessary to construct a retaining wall - an improvement that

had not been included in the original calculations. It was also thought desirable to upgrade some of the fittings in the apartments. Fresh calculations were made and Messrs Reid and White concluded that Landsal needed an additional $140,000. By letter dated 22 August 1986 (Ex.Al4) Landsal made its written submission to the RE1 for the additional loan. On 9 September 1986, the RE1 replied (Ex.Al5) in these terms:-

"We are pleased to advise that your application for an increase of $140,000-00 on the above loan account has been approved.

We shall advise you in due course when updated

Mortgage Documents are ready for signing."

Exhibit A15 was signed by Mr. Barrie Zeitz who, at that time,

was REI's loans manager. The case for the applicants was that the REI, having	received Landsal's application and having approved the grant
of the additional loan of $140,000, thereafter refused to advance the money. In para.23 of the statement of claim it was pleaded as follows:

"23. Between the 9th day of September, 1986 and the 18th day of November, 1986 the respondent engaged in conduct that led all of the applicants to believe that the respondent had decided to advance the additional loan to Landsal, had not changed its decision to advance the additional loan to Landsal, and that it would so advance the additional loan."

That allegation was then supported by a series of particulars that referred to various statements allegedly made by different people in the name of, or on behalf of, the REI. It is common ground that the RE1 advanced to Landsal (or otherwise gave accommodation to it in respect of) amounts totalling the original loan of $1.6M; it is also common ground that it did not advance Landsal the additional $140,000 and that Landsal and Reid Constructions failed to complete the development of the apartments. It is also agreed that in October 1987 the REI, exercising its power of sale as a mortgagee in possession, sold the property for only $l.lM.

The accusations that were advanced by the applicants

against RE1 were set out in paragraph 25 of the statement of

claim in these terms: 

"25.1 As at the 9th day of September, 1986 the respondent did not intend to advance the additional loan to Landsal or prepare updated Mortgage documents;

in the alternative,

25.2 During the month of September or October, 1986, and after the 9th day of September, 1986, on a specific date not known to the applicants, the respondent changed its intention as reflected in its letter dated the 9th day of September, 1986 and decided to not advance the additional loan to Landsal."

Before I turn to the facts of this case in any detail, it will be helpful, first, to identify the witnesses in the trial and to state my assessments of them and of their evidence. The witnesses for the applicants were the third and fourth applicants, Messrs Reid and White, together with Mrs. Barbara Schutz, a former employee of the REI. Mr. Peter Parry, the General Manager of the RE1 was the principal witness for the defence; the only other witnesses, both of whom were called as part of the respondent's case, were its solicitor, Mr. Andrews and a Mr. Brereton of the State Bank. The State Bank had been Landsal's banker at all material times and Mr. Brereton was called to give evidence of the company's financial circumstances from time to time. As events transpired, neither his evidence nor that of Mr. Andrews was of material importance but to the extent to which it may' be necessary to refer to either of them or their evidence it should be stated that I accept both as wholly trustworthy witnesses, even though, in the case of Mr. Andrews, there were deficiencies in

his evidence because of his poor memory.

Mr. Parry was a bad witness. As the evidence unfolded, it became apparent that the RE1 had been grossly inept in the handling and maintenance of the Landsal account; that ineptitude was, I regret to say, a reflection of the character of the Society's chief executive. His evidence was confusing in part and it elsewhere lacked conviction. His conduct in the crucial months of October - November 1986, as described by

other witnesses, was incomprehensible; he had the opportunity to explain himself when giving his evidence but he failed. In recounting the history of this matter and stating my findings I do not intend to rely upon what he said in evidence unless

it has been substantiated by other acceptable probative

evidence. Before turning to the evidence of the applicants, I note that the respondent did not call the REI's former loans officer Mr. Zeitz. He could have been a very material witness and his absence was not explained. That absence did nothing to dispel1 the conclusion that I reached that the RE1 was a bungling inefficient organisation which -inefficiency had been brought about principally because of his and Mr. Parry's incompetence.

Messrs Reid and White endeavoured to give their evidence to the best of their respective ability. I do not consider that either of them set out to mislead the court deliberately but each carried a deep sense of grievance against the RE1	because of their perception of the way in which they had been	treated. I consider that it is necessary, in some sensitive
areas, to approach their evidence with care.
The remaining witness was Mrs. Schutz; although there were some unfortunate gaps in her memory and some obvious errors in her evidence, she remained a most reliable witness.
I reject any suggestion that her evidence was coloured because
of her disapproval of Mr. Parry. She did disapprove of him
but in my assessment of her character, it did not interfere with the quality of her evidence. Although many of the important findings of fact in this case will be based on the contents of documents, to the extent to which it will be necessary to turn to oral evidence in contentious areas, I will turn first to that of Mrs. Schutz.
Although the primary task will be to examine and resolve the disputed issues surrounding the failure of the RE1 to advance $140,000 to Landsal, the appropriate starting point is an examination of the terms and conditions under which the original loan of $1.6M was made. Central to that examination will be, first, the obligations (if any) on Landsal to pay interest on the loan and secondly, the manner in which the RE1 conducted its business.
Exhibit A6 was the Loan Agreement of 18 December 1985 in which Landsal was named as borrower, Messrs Reid and White
mortgagee". The Agreement specified an agreed limit of $1.6M were named as guarantors and the RE1 was described as "the and acknowledged an initial advance of $350,000. The provisions dealing with interest appear in the schedule to the agreement; they are lengthy but in view of the importance of this subject they must be set out in full:-

"1. The Borrower will pay to the Mortgagee interest on the principal sum from time to time outstanding at the rate of 18.0 per centum per annum (hereinafter called 'the Prescribed Rate') computed from the date of the Initial Advance and payable by calendar monthly

instalments the first of such instalments shall be made on a date being the last day of the month next following the date of the Initial Advance and thereafter on the last day of each and every month until the principal sum is repaid in full PROVIDED HOWEVER that if the Borrower pays an instalment of interest within seven (7) days of its falling due as herein provided if therexand no outstanding default or breach on the part of the Borrower or any Guarantor in the due observance or performance of the covenants herein contained or implied or contained in any Guarantee and Indemnity or contained in any security given by the Borrower or any Guarantor to the Mortgagee AND PROVIDED THAT the power of sale under any security given by the Borrower or any Guarantor to the Mortgagee shall not arise then the Mortgagee shall accept interest at a rate being at all times 2.0 per centum per annum below the Prescribed Rate (hereinafter called 'the Acceptable Rate')

2.   If and so often as interest due under this Agreement is in arrear for a period of not less than seven (7) days after the day appointed for payment thereof such interest shall be treated as an accretion to the principal sum as from the day fixed for payment and this Agreement and all powers hereby conferred or incorporated shall extend to such capitalised interest with interest thereon at the Prescribed Rate but without prejudice to the right of the Mortgagee at any time or times to enforce payment of any capitalised interest as interest in arrear

under Clause 1 of this heading 'INTEREST' but the provision for reduction of interest on punctual payment shall not apply to any

interest capitalised under the powers contained
in this Clause 2."

It is, of course, abundantly clear that the provisions
quoted above contemplated the borrower actually paying
interest calendar monthly on the last day of each calendar

month (with a period of seven days grace). Consider however the case for the applicants as pleaded in sub-paragraph 17.3 of the statement of claim:

"It was an express oral term of the said agreement that interest be capitalised monthly and debited to the then current borrowings. That term was agreed in or in about the months of November or December, 1985 between Barry Zeitz on behalf of the respondent, and Andrew Reid and Frank White on behalf of Landsal."

The next matter to consider is the letter of 18 December 1985 (Ex.A7) from the RE1 to Landsal. It read as follows:-

"Following settlement, we enclose your loan repayment book with instalment details appearing on the inside front cover.

The first payment, due at the end of this month, may be made for a proportionally adjusted amount of $13,935.00 and the normal repayment of $24,000.00 will be due at the end of each month thereafter.

Please do not hesitate to call me should you require any further information."

The accompanying loan repayment book ('Ex.A8) was that used by RE1 for an "ordinary housing loan account" and carried an endorsement to that effect. The figures of $13,935 and $24,000 appearing in Ex.A7 are clearly wrong: they are the

been advanced on 18 December. Quite clearly someone in the

amounts that would have been payable if the whole $1.6M had

RE1 had failed to appreciate that the Landsal loan was a building loan operating on progress payments; instead, it was treated in the same manner as a conventional housing loan. It is amazing that such a mistake could have been made - the more so as the RE1 was a small building society and the Landsal loan was one of the largest loans that it had then made. However, as will become apparent the situation actually deteriorated.

Mr. Reid was perturbed when he received the letter of 18 December seeking payment of $13,935 at the end of the month. When asked to state the cause of his concern it became apparent that he was not objecting to the requirement that interest be paid; his complaint concerned the amount of the payment. At page 517 he said that he rang Mr. Zeitz and "I reminded him that only $350,000 had been advanced and that it was an interest only loanw. This statement squarely contradicts the allegation in sub-paragraph 17.3 of the statement of claim that interest was to be capitalized. However that is not the end of the matter. According to Mr. Reid, Mr. Zeitz apologised for treating it as a home loan and

then volunteered -

". . . that it would be probably easier if in the

future they simply debited the interest as it became

due and payable to the account." (p.517)

That proposal was, of course, consistent with the

capitalization of interest and, in fact, that proposal was

of interest until a material change in circumstances occurred	implemented; Landsal thereafter did not make a monthly payment	in the following October. In my opinion the answer to this
confusion about Landsal's obligations with respect to interest lies in the fact that Mr. Reid did not truly understand what was meant by the expression "capitalizing interest". What he (and Mr. White) were attempting to convey in their evidence
was that neither they nor Landsal had other funds out of which Landsal could pay interest to the RE1 on its borrowings; on the one hand they acknowledged that Landsal had to pay interest to the RE1 but on the other hand they were confessing
that, until the sale of the apartments produced a cash flow, any payments of interest would have to come from progress payments forming part of the $1.6M. I base this finding on the following passage in Mr. Reid's evidence. He was asked at p.517-8 how he responded to Mr. Zeitz' suggestion that interest be debited:

"I said, that's fair enough. If that's the way you

want to do it, makes no difference to me.

Did you perceive any difference between doing it that way and doing it the way you had previously experienced, that is, sending a monthly cheque? ... Not really.

Why? ... Normally when you make your progress request for your payment, that would normally have included sufficient to actually cover the monthly interest.

So at that point in time you perceived no' difference

between the two methods?... I could not see any difference because he had informed me (and) he did reinforce the fact that the maximum we could draw, which did include the interest was 1.6 million."

It was not accurate to say that there was no difference

in the two schemes. If a borrower seeks a progress payment of

(say) $100,000 and he is paid that sum with interest then being debited to his account, he has $100,000 to spend on his project; under the other scheme he must first pay his interest and then the balance of $100,000 is available for the project. Although both schemes produce the same amount for the project (subject to interest adjustments) under the first scheme the progress payments are larger. However, I am satisfied that neither Mr. Reid nor Mr. White comprehended this difference.

On the other hand I am also satisfied that the claim by the applicants that the loan of $1.6M was originally negotiated upon the premise that interest would be capitalized is wrong. It is contrary to the documentary evidence (the loan agreement Ex.A6) and it was not supported by the oral evidence of either Mr. Reid or Mr. White. It is also contrary to the letter of 18 December 1985 (Ex.A7), although care should be taken about placing any reliance on that letter because of its many mistakes. At the most, it is some evidence of the claim that it was not normal business practise for the RE1 to capitalize interest on the loans that it made.

Notwithstanding Mr. Reidps complaint to' Mr. Zeitz, the RE1 did nothing to alter their records; it continued to treat the Landsal loan as an ordinary housing loan account. Thus Mr. Zeitz wrote Landsal on 10 February 1986 (Ex.Al1) explaining

that an increase in interest rates meant that its monthly	interest payments were now $26,682.00. At that stage Landsal
had only borrowed the initial advance of $350,000; understandably, Mr. Reid said that he ignored this letter. Two other letters dated 7 July 1986 and 18 August 1986 from the RE1 to Landsal (Ex.Al2 and A13) perpetuated the same mistake. Each of those was signed by Mr. Parry. He had to acknowledge in his evidence that the letters were inappropriate and were only intended for "housing" borrowers. That may be so, but his signature on them was also consistent with my earlier assessment of his and his society's incompetence.
When Landsal wrote the RE1 on 22 August 1986 (Ex.Al4) seeking a further $140,000, it was still well within the
limits of the original $1.6M. - that is, there were still
funds available against which it could draw. At that stage nine progress payments totalling $1.25M had been made, although to that must be added unpaid interest of about $80,000. It was at about this time that Mrs. Schutz became involved with the Landsal account. She had commenced working with the RE1 as a loans officer on 8 September 1986. She said that she first became aware of the existence of the Landsal account when the directors of Landsal wrote to RE1 "seeking a further advance of the original amount approved" (p.608). She thought that this would have been within "a week or two" of the commencement of her employment (p.610). As approval of
the additional loan had been given on 9 September, the day following the commencement of her appointment, I take her
evidence to mean that she first became aware of the account when she perused the Landsal file and read the request for the further advance.
At about this time, Landsal had also applied, by letter dated 29 September 1986, for a further draw-down of $100,000
against the original loan of $1.6M. The request had been
referred to the attention of Mrs. Schutz. Her evidence was that she checked the Landsal file and, upon finding that interest payments were in arrears to the extent of approximately $80,000, she spoke to m. Parry; she said that she told Hr. Parry that she felt that the arrears situation had to be addressed before any more funds were advanced. Asked to describe Mr. Parry's reaction, Mrs. Schutz said:-

"He didn't seem to be terribly concerned about it. He rang down on his phone and spoke to Barry Zeitz about it and he had his phone on speaker so I could hear as well. And, Barry said not to worry about it, it was a piece of cake and just to pay it. And, so Mr. Parry said: well, pay it." (p.612)

Nevertheless Mrs. Schutz said that Mr. Parry agreed with her proposition that an attempt should be made to have Landsal make up its interest payments monthly before the RE1 agreed to advance any further moneys. Her evidence was that Mr. Parry instructed her to obtain a month's interest payment and that she spoke, either to Mr. Reid or Mr. White, telling them that

the RE1 would advance the $100,000 progress payment if at least one month's interest was paid. According to Mrs.	Schutz, the director with whom she spoke was agreeable but
said that Landsal did not have funds from which to make the payment; the director therefore suggested that the advance by the RE1 be increased by an amount equal to the interest payment and that Landsal would upon receipt of the inflated sum pay the interest payment to the REI. Mrs. Schutz told the director that she would have to discuss that with Mr. Parry; she said that Mr. Parry agreed with her that the proposition should be rejected.
It was at about that stage that Mrs. Schutz suggested to Mr. Parry, and he agreed, that there should be a meeting with the two directors, Mr. Reid and Mr. White. This was the important meeting of 1 October 1986. It was Mrs. Schutz' evidence that she, Mr. Parry and only one of the Landsal directors were present. Mr. Reid and Mr. White both claimed that they were present and both gave evidence of conversations which they say took place at the meeting; I am satisfied that both were present and that Mrs. Schutz was mistaken. According to Mrs. Schutz:

"The main thrust of the conversation was the issue of capitalization of the interest. The director there believed an arrangement was made at the beginning of the loan that all interegt would be capitalized and Mr. Parry said 'that wasn't the case'." (p.614)

Curiously, neither . White nor Mr. Reid used the word

"capitalization" when discussing the events of the meeting of

interest payments were discussed at that meeting; in fact, it	1 October 1986. Both men acknowledged that the matter of
was the only topic of conversation that Mr. White could remember. His evidence was:

"The question arose as to the method by which we were paying the interest and Mr Parry said that the method that was being used was not acceptable as far as their internal accounting procedures were concerned and that he would have to receive a cheque from us in payment of the interest." (pp.319-320)

Mr. Reid, when asked to identify the purpose of the meeting said that it was "to sort out the misunderstanding or supposed problem" (p.725) about the additional loan of $140,000. Later however (p.729) he acknowledged that the subject of interest payments was raised and that Mr. Parry said that the existing situation was "no longer acceptable".

I find that at this meeting Mr. Parry made it clear that the RE1 thereafter required interest to be paid on a monthly

basis.

Certain conclusions can be drawn from the meeting of 1 October. First, the RE1 made it clear and Messrs Reid and

White accepted that henceforth interest payments were to be paid monthly. Secondly, whatever arrangements may have been made by and with Mr. Zeitz in the previous December, those

arrangements were no longer operative. Thirdly, the RE1 would

not insist on payment of the arrears of interest of $80,000 as a condition of making payment of the balance of the progress payments (as the debt was not to exceed $1.6M this was an

directors of Landsal said that the monthly interest payments	effective capitalization of these arrears). Fourthly, the
could only be sourced out of progress payments. Fifthly, both Mr. Reid and Mr. White knew (or, at least assumed) that the $140,000 would be advanced on the same terms and conditions as
the original $1.6M. Finally, nothing was said at the meeting of 1 October by either Mr. Parry or Mrs. Schutz to the effect that the advance of $140,000 might not be forthcoming.
Consistent with the arrangements that had been made at the meeting of 1 October, Landsal, on 6 October, made the interest payment of about $21,000 that was due for the month of September. However this money came from the progress payment of $100,000 that had been the subject of discussions at the October 1 meeting; it had been paid over to Landsal on 6 October.
Mrs. Schutz continued to be concerned about the Landsal account and the prospect of the RE1 making the further advance of $140,000. With Mr. Parry's approval, she obtained a valuation of the property, presumably to check its current value against the lending limits in the loan agreement. I find that the valuation that she obtained was the letter of Mr. B.D. Branson dated 10 November 1986 (Ex.Al8); that document was not, in fact a valuation as it merely listed the author's appraisal of each of the fourteen apartments and then stated a total figure of $2,104,000.
The RE1 was not obliged, according to the conditions of the Loan Agreement, to advance any further money if the advance, when added to all other moneys owing under the loan, exceeded 85% of the value of the land and improvements. There was conflicting evidence about the REI's limit being 80% or
85% of valuation. However, that can be put to the side
because Mrs. Schutz was clear in her evidence that Mr. Branson's appraisal re-affirmed her view that the additional loan should not be made and that Mr. Parry agreed with her. Her evidence continued at p.618:-

"I said: well, the clients have got a letter of approval for the funds, how are we going to go back on that approval? We're going to need some solid ground on which to stand. Mr Parry said: well, we needn't worry about that, we'll use their arrears situation as a reason for not advancing funds, because that's a fairly standard practice, if you're in arrears you don't get any more funds."

The most disturbing feature about Mrs. Schutz' evidence was her inability to identify dates and the sequence of events. But with respect to this section of her evidence, the date of Mr. Bryson's letter must mean that it was on or shortly after, 10 November that she showed Mr. Parry the appraisal, advised him not to make any further advances and convinced him that he should change his mind about advancing the $140,000. I am satisfied that from late September or early October, Mrs. Schutz had been concerned about the Landsal account; I am further satisfied that she had been expressing those concerns to Mr. Parry who did nothing about	the matter; probably, he was hoping that the problem would	"just go away"; such vacillation would be entirely consistent
with his character. It was the case of a forceful, knowledgeable junior officer and a weak, indecisive chief executive. These findings are based on my acceptance of Mrs. Schutz' further evidence that, having agreed with her that the additional loan should not be made, Mr. Parry was unable to muster the courage to tell the Landsal directors. The R E 1 did not take any action to cancel its approval of the additional loan until the events of 18 November 1986.
Before discussing those events, it is necessary to go back to 9 September and summarise the evidence dealing with the preparation of the documents for the additional loan.
Subsequent to the letter of 9 September, (Ex.Al5) Messrs Reid and White said that they had been led to believe, not only that the additional loan of $140,000 had been approved, but that it would be imminently forthcoming as soon as the necessary documents had been prepared. Although I reject some parts of their evidence on this subject for the reasons which I will set out, the main thrust of their complaints was supported by Mrs. Schutz. In order to state my conclusions on this subject, I will deal first with the bvidence of Mr. Andrews, the solicitor for the RE1 because Mr. Reid was insistent that Mr. Andrews had told him that he (Mr. Andrews) was in the course of preparing documents for the additional
prior thereto he had been responsible for the preparation of loan. Mr. Andrews explained that in 1986 and for some years
mortgage and loan documents on behalf of the REI. He was familiar with the original $1.6M advance to Landsal because it was, having regard to the standards of the REI, a "large transaction" (p.1022).
Mr. Andrews memory of the events of 1986 was not good. I accept him as a witness who gave his evidence to the best of his ability but, unfortunately, in some critical areas that evidence was deficient. For example he acknowledged that Mr.
Reid rang him - at least on one occasion and perhaps more -
enquiring "as to the whereabouts of those documents". When asked to explain further, Mr. Andrews said:

"1 knew that there were basically problems with this

account and that I - and non-payment of interest on a monthly basis, but I really can't recall."

(p. 1026)

He also had a recollection that was likewise vague of Mrs. Schutz telling him that "Landsal was one of those loans which was substantially in arrears" (p.1022)

When pressed in cross-examination, Mr. Andrews was prepared to concede that he did not have an independent recollection of telling Mr. Reid that he (Mr. Andrews) did not then have instructions to prepare documents for the additional loan; nevertheless, it was a fact and I accept his evidence that he did not have those instructions. He may have been

prepared to protect his client by holding back, but I am not	prepared to find that Mr. Andrews told deliberate lies by
informing Mr. Reid falsely that he had instructions to prepare documents and that they were in the course of preparation.
Mr. Reid said (p.722) that he rang Mr. Andrews (whom he knew to be the solicitor for REI) "within a day or two" of receiving the letter of 9 September (Ex.Al5). According to Mr. Reid, Mr. Andrews said that the documents would "be available in about ten days"; he repeated this evidence in cross-examination at p.725. As I am satisfied that Mr. Andrews never received any instructions from RE1 with respect to the additional $140,000, I am forced to reject this passage of Mr. Reid's evidence. The probabilities are that Mr.
Andrews might have assumed - from what Mr. Reid told him -
that such instructions would be forthcoming and perhaps this caused some confusion; whatever may have occurred between the two men in their discussions I am satisfied of two things: first, the RE1 never instructed Mr. Andrews to prepare any supplementary documents and secondly Mr. Andrews never told Mr. Reid that he had received those instructions.
There are several reasons that justify these conclusions. For example, neither RE1 nor Mr. Andrews' firin discovered any files or documents that would undoubtedly have come into existence if such a set of instructions had been given. Mr. Andrews did find a note or memorandum dated 3 October 1986
the Lands Titles Office; however that proves nothing. It instructing a clerk to obtain a copy of Landsal's title from
could have been a preparatory step based on Mr. Reid's phone
calls. Then it was Mr. Andrews' evidence - which I accept -
that his normal period of time for the preparation of such loan documents was 48 hours and not ten days. Finally, there was Mrs. Schutz' evidence that she, acting under direct instructions from Mr. Parry, was deliberately telling Messrs
Reid and White (falsely) that the documents were in the course of preparation when she well knew that no such instructions had been given. The following extract from her evidence (pp.627-8) indicates the seriousness of the situation:

"When you say you were getting some pressure, what occurred?. . . Pressure in that Mr Reid and Mr White would ring up and request that the mortgage documents be prepared, or when they were going to be prepared so they knew when to expect the money.

Well, when they rang up, what response did you give? ... They were in the process of being prepared.

And was that in fact true?... No.

Why then were you saying that?. . . I was told to say that.

By whom?... Mr Parry."

In addition, Mrs. Schutz said that she likewise had to engage in subterfuge with Mr. Andrews. She was in regular contact with him and the subject of the Landshl documentation was often discussed; she said that she told him that he was "to await instructions" (p.628). Mrs. Schutz became increasingly concerned; when a Landsal director rang Mr. Parry

he would refuse to take the call, transferring it to her. On

one occasion, when such a call had been diverted to her, she

kept the caller on "hold" and confronted Mr. Parry saying:-

"I'm not going to take these calls any more. You'll
have to tell them yourself." (p.631)

According to her, Mr. Parry refused. In this setting, Mrs. Schutz took a phone call from one of the Landsal directors on 18 November and blurted out that the loan would not be forthcoming. Confirmation of this date was available

from Mr. Brereton of the State Bank who had a file note (Ex.R23) that Mrs. Schutz advised him that day that no more funds would be advanced to Landsal after the last draw against the original loan of the $1.6M.

I am satisfied that the director to whom Mrs Schutz spoke was Mr. White. He said in evidence:-

""She told me that she had known personally that we
would not be getting the $140,000 and that she'd
known that from the beginning of September." (p.346)

The reference to the beginning of September is clearly wrong and represents an example of Mr. White adding an embellishment to his evidence. As I said at the outset, some areas of his and Mr. Reid's evidence had to be treated with caution. As to the receipt of the advice 'that no further money would be forthcoming, that is a different matter; that is the sort of information that would stand out in one's memory.

The Landsal directors met with Mr. Parry and Mrs. Schutz on more than one occasion. For example, it was pleaded in the statement of claim and admitted in the defence that one such meeting was held on 11 November 1986; I have referred to this meeting by reference to the pleadings because the evidence of all witnesses a6 to dates of meetings was blurred. The point of the exercise is to establish that there was at least one such meeting in the early part of November and if Mrs. Schutz had known of Mr. Bryson's letter at the time when such a meeting was held I am satisfied that she would have remembered it. If therefore there was such a meeting on 11 November, I find that the RE1 received Mr. Branson's appraisal after the meeting.

I am satisfied that prior to 18 November 1986, both Mr. Reid and W. White had a belief, reasonably held as a consequence of what Mrs. Schutz had said, that the approval for the loan of $140,000 was still on foot and that documents with respect to it were in the course of preparation. Until 10 or 11 November or thereabouts the statements from the RE1 giving rise to the first belief were accurate in the sense that Mr. Parry had not made a decision to withdraw the additional loan; statements to the effect that documents were in the course of preparation were of course in a different category. They were, at all times, false and knowingly false.

At this stage, it is necessary to consider a letter from the RE1 to Mr. White dated 31 October 1986 (Ex.Al7). It was written by Mrs. Schutz but its contents were dictated by Mr. Parry. It saidr-

"Further to your meeting with the General Manager and myself, and the need to comply with the mortgage documentation relating to your loan at The Esplanade, Seacliff, I advise that the monthly interest amount required for October is $25,181.28.

As agreed with you, as long as this payment is made prior to 7th November 1986, no penalty interest will

be applied to your account.

As you are aware, the mortgage document provides for

a penalty of 2% should payment not be received by

the due date.

We reiterate the Society's conditions of lending that the total outstanding loan, including unpaid interest, is not able to exceed 80% of the security valuation.

As soon as we receive the interest payment on a regular basis, and the security restriction is complied with, we will be able to pursue the increased lending you have requested."

The meeting that is referred to in the first paragraph was probably the meeting of 1 October as the requirement that interest be paid was consistent with what had been agreed at that meeting. Mrs. Schutz' evidence about the additional loan

of $140,000 and the application of this letter to it wasr- "Now, in the last paragraph - can you see the last line, the reference to the increase lending you have requested? ... Yes.

As at the date of that letter of 31 October that could only refer to $140,000, couldn't it?... It can only because the other $100,000 was advanced on 6 October...

Yes?... so it can only refer to that.

yes. And, what you said in that paragraph was	consistent with what - with Mr Parry's instructions
to you, wasn't it?... Yes.
And, consistent with what Mr Reid had been told at the meeting of 1 October?... Yes.
And, what Mr White had been told at the subsequent meeting? ... Yes.
In other words it was your understanding that if the interest payments were put on a proper footing the $140,000 would be paid? ... No.
Well, isn't that what you said in that last paragraph? ... That's what I've said in the letter but all my letters were vetted by Mr Parry." (p.661)

Unfortunately this passage of Mrs. Schutz' evidence was not explored in any further detail. The most that can be drawn from it is that Mr. Parry instructed her to write about the conditions that would enable the RE1 "to pursue the increased lending" but that she had a personal belief or feeling that the $140,000 would not be paid even if the interest payments "were put on a proper footing". One is left to wonder whether she was speaking from knowledge or expectation. In view of the date of Mr. Branson's valuation (10 November) and her evidence that Mr. Parry's decision not to lend the additional amount was as a consequence of seeing it, it seems that Mrs. Schutz was stating what it was that she expected would happen when questioned about the contents of the letter of 31 October.

The question that I must decide is whether the acts or

omissions of the RE1 are or might be actionable at the suit of

reliance upon the agreement to make the additional loan and	one or more of the applicants. It has been pleaded that in
the subsequent conduct of the REI, Landsal did not seek an alternative source of finance and that, having had its overdraft facility with the State Bank of South Australia .extended from $20,000 to $60,000, it proceeded to utilise the whole of that facility. It has also been pleaded that Landsal's obligations to the State Bank had earlier been
secured by guarantees from Mr. Reid and from Mr. & Mrs. White.
The statement of claim concluded with a series of allegations, the effect of which may be summarised as follows:- if the RE1 had not been guilty of the impugned conduct, an alternative source of finance would have been found which would have led to the completion and sale of the apartments at a profit - Messrs Reid and White would not now be facing a claim in the Supreme Court of South Australia at the suit of the respondent under their guarantee in respect of the short-fall consequential upon the REI's forced sale of the property - and Mr. & Hrs. White would not have had to accept liability to the State Bank under their guarantee because of Landsal's inability to discharge its debt to the Bank.
As the parties have agreed that I shouldmake findings of fact and law on the evidence thus far led, so that they may thereafter assess their positions, I state the following conclusions:
1. The letter of 9 September 1986 (Ex.Al5) did not state

when the additional loan of $140,000 would be available. The logical inference however is that it would not be paid over until the original loan of $1.6M had been exhausted. The claim, in sub-paragraph 22.3 that there wae an implied term that the additional loan would be available "on short notice" must be rejected.

2.    The additional loan was (mutatis mutandis) subject to the same terms and conditions as the original loan.

3.   No matter what oral or collateral agreements may have

been made on the subject of interest with Mr. Zeitz, it was agreed at the meeting of 1 October 1986 that henceforth Landsal was to pay interest monthly. Landsal complied with that agreement by paying the September interest on 6 October; however, and notwithstanding the

warning that was contained in Mrs. Schutz' letter of 31 October (Ex.Al7) Landsal failed to pay the October interest by its due date.

4.    The failure by Landsal to pay the October interest by its due date (7 November) occurred at a point of time when the RE1 had not yet advanced the whole of the $1.6M loan (that was completed with an advance of $45,000 on 19 November).

5.   Landsal's default on 7 November entitled the RE1 to

decline to make any further advances (clauses 3(a) and 6(a) of the Loan Agreement Ex.A6). At pp.814-815, Mr. Parry said that it was not the non-payment of this

mind; his evidence was that he changed his mind after he instalment of interest that caused him to change his saw Landsal's financial statements. As these accounts

were dated 24 November, some six days after Mr. Brereton's file note, it explains why no reliance can be placed on Mr. Parry's recollection of the events.

6.    Mr. Parry made the decision on or shortly after 10 or 11

November that the RE1 would not make the further advance of $140,000.

7 .    The REI's decision was communicated to Landsal by Mrs. Schutz in a telephone conversation with Mr. White on 18 November.

8.    In the statement of claim it was pleaded that as at 9 September 1986 the RE1 did not intend to advance the additional loan to Landsal. This has not been made out and must be rejected.

9.    In the alternative, it was pleaded that on a date unknown to the applicants but subsequent to 9 September the RE1 changed its intention to make the additional loan. This has been made out, but only as from 10 or 11 November at the earliest. The history of vacillation and deception practised by the RE1 to that date demanded that such a change be notified immediately. In the strange circumstances of this case, that delay might well have been actionable as a breach of contract if it were not for the finding in paragraph 10.

10.  The RE1 was not required to advance the additional loan

of $140,000 until a date subsequent to 19 November 1986 -

of the terms of the loan agreement: see paragraphs 1 and and only then on condition that Landsal was not in breach

2 of this summary. However, Landsal breached the terms of the Loan Agreement by failing to pay the October interest on the due date; that breach, while it subsisted, released the RE1 from its contractual obligation to make the additional loan.

I turn now to the allegations of misleading or deceptive conduct and fraud.

The conduct of the RE1 that might be capable of being labelled misleading or deceptive is that reflected by what it wrote to Landsal and what its officers said to Mr. Reid and to

Mr. White with respect to the original loan of $1.6M and the

proposed additional loan of $140,000. If what the RE1 said or did amounted to misleading or deceptive conduct with respect to Landsal then it would not be necessary to make individual assessments of the separate circumstances of the other applicants to ascertain whether that conduct flowed through to them in a manner sufficient to ground an appropriate cause of action; there was sufficient evidence to establish that the RE1 knew of the respective roles of Reid Constructions as the builder and Messrs Reid and White as guarantors. The position of Mr. and Mrs. White and the State Bank was further removed but not sufficiently for the RE1 to escape liability. If, on

misleading or deceptive conduct with respect to Landsal - if the other hand, the challenged conduct did not amount to	Landsal cannot succeed under this head - I am unable to see
how any of the other claimants could independently succeed.
The findings of fact that I have thus far made, make it clear that the allegation of fraud as at 9 September 1986 has not been made out and, subject to one qualification, I am also of the opinion that neither fraud nor misleading or deceptive conduct can be sheeted home against the RE1 until 10 or 11 November 1986 or shortly thereafter. The qualification is the deliberately false statements that were earlier made to the effect that documentation for the additional loan was in the course of preparation. However, none of the applicants is able to take much comfort from this finding for this reason: whether the documents were or were not then in the course of preparation and whether true or false information about the documents was given to the applicants, the fact remains that the RE1 was entitled as from 7 November to refuse to advance the additional $140,000 until, at least, Landsal had remedied
its default by paying the October interest - and that default
was never remedied.
The remaining finding that must be made relates to the conduct of Landsal between 10 or 11 November and 18 November. In that period of time the RE1 failed to inform the applicants of the decision not to make the additional advance.
Furthermore, the probabilities are, and I find that in that
same period, the directors made one or more enquiries of
either Mr. Parry or Mrs. Schutz and were falsely told that the documents for the additional loan were in the course of preparation. That was not only misleading or deceptive conduct affecting all applicants, it was a fraudulent misrepresentation upon which all five applicants would have relied. The question of what damages, if any, flowed from this conduct has not been addressed. It remains to be seen whether the applicants can establish that they would have been able to take some remedial action with respect to alternative financing for the property if the RE1 had informed them urgently of its decision not to advance the $140,000.
After the parties have had the opportunity to consider these findings, it will be necessary for the matter to be re- listed for further hearing. I reserve to all parties liberty to have it re-listed on 7 days notice; I also reserve for argument the question of costs to date.

I certify that this and the 3 2 preceding pages are a true copy of the Findings of Mr. Justice O'Loughlin.

Counsel for the Applicants	Mr. N.W. Morcombe Q.C. and Mr. P.D. Kerin
Solicitors for the Applicants :	Peter Kerin & Associates

Counsel for the Respondent : Mr. D.J. Bleby Q.C. and

Mr. P.D. Corkery

Solicitors for the Respondent :	Piper Alderman
Hearing Datea	: 24-27 September, 28-31

October, 1 November, 18-20
and 24 December 1991.