Morton v Elgin-Stuczynski
[2008] VSCA 25
•22 February 2008
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 9160 of 2004
| NORMAN JAMES IAN MORTON | |
| Appellant | |
| v | |
| ROMAN ELGIN-STUCZYNSKI and MARCUS ELGIN-STUCZYNSKI | Respondents |
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JUDGES: | NEAVE and KELLAM JJA and CAVANOUGH AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 29 October 2007 | |
DATE OF JUDGMENT: | 22 February 2008 | |
MEDIUM NEUTRAL CITATION: | [2008] VSCA 25 | |
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CONTRACT – Construction – Whether loan agreement required the payment of compound or simple interest – Terms of the loan agreement ambiguous - Whether it was necessary to imply a term requiring payment of compound interest or simply interpret term in light of surrounding circumstances – Construction requiring compound interest preferred – Appeal allowed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr P J Hayes with | Michael J Creelman |
| Ms D Mandie | ||
| For the Respondents | Mr M Heaton QC with | Diana Cohen & Associates |
| Mr M Campbell |
NEAVE JA:
In 1990 the appellant, Mr Norman Morton, lent the respondents, Mr Roman Elgin-Stuczynski and Mr Marcus Elgin-Stuczynski (hereafter Roman and Marcus Elgin respectively) $40,000, in two separate payments of $25,000 and $15,000. $10,000 of the loan were later repaid, but the balance remained outstanding. In 2004 the appellant issued proceedings to recover the outstanding $30,000, together with compound interest.
The judge below ordered repayment of the sum of $30,000, together with simple interest, at the interest rates charged by the Commonwealth Bank during the relevant periods. The loan agreement provided for the payment of ‘accrued interest for the period of the loan, at the rate of interest charged by the Commonwealth Bank of Australia for overdrafts in excess of one hundred thousand dollars ($100,000)’. The appellant claims that the agreement requires the interest to be calculated as compound interest. The sole point to be determined on this appeal is whether the respondents agreed to pay compound or simple interest.
Background
The circumstances in which the loan was made were as follows. Mr Roman Elgin was a director of a construction company, REA, which he had established. His son, Mr Marcus Elgin, was also a director of REA and worked for the company. In late 1989 REA became involved in a building dispute with Verl-Inns Pty Ltd about a payment of $800,000. REA and Verl-Inns Pty Ltd attempted to resolve their dispute through arbitration, which was adjourned in late 1989. REA did not have sufficient funds to continue the arbitration and its banker, the ANZ Bank, refused to lend it funds to do so.
Mr Morton acted as REA’s accountant through his company and also provided accountancy services to Mr Roman Elgin and Mr Marcus Elgin personally. On 9 January 1990 the defendants came to Mr Morton’s home office and said they were in financial difficulties. They needed a loan to continue the arbitration, but were unable to raise it from their bankers.
Mr Morton agreed to lend the respondents $25,000. On the same day, he and Mr Marcus Elgin went to the Kew Branch of the Bank of Melbourne. Mr Morton instructed the bank officer to withdraw $8,000 from the account of his company Norman J. I. Morton Pty Ltd and a further sum of $17,000 from the account of his company Dakan Pty Ltd, to lend to the respondents. He requested the bank officer to draw bank cheques for each of these amounts payable to Mr Marcus Elgin. These were given to Mr Marcus Elgin in accordance with Mr Morton’s agreement to advance this amount to him and his father.
On 31 January 1990, the respondents went to Mr Morton’s office and asked him to lend them a further $15,000. Mr Morton attended the same bank branch, and obtained a bank cheque for $15,000 from an account held in the name of Forth Dibb Nominees Pty Ltd, the trustee of his family trust, which was payable to Marcus Elgin and given to him.
In April 1990 the ANZ Bank withdrew its support for REA and decided to appoint a receiver. Mr Morton was at REA’s office on that day and after hearing of the appointment of a receiver he drafted a document by hand and gave it to REA’s secretary to type. The document provided as follows:
LOAN AT CALL AGREEMENT
This document is dated the 6th day of April, 1990 and is to acknowledge the receipt of loan monies by Roman Elgin-Stuczynski and Marcus Elgin-Stuczynski, both of ‘Fernbank’, Molesworth, in the State of Victoria, hereinafter referred to as the Borrowers of the one Part; and Norman James Ian Morton, of 199 Barkers Road, Kew, in the State of Victoria, hereinafter referred to as the Lender, of the second Part; whereby the Lender has advanced to the Borrowers the sum of Forty Thousand Dollars ($40,000.00) in total as a private loan, comprising Twenty Five Thousand Dollars ($25000.00) on the 9th January, 1990 and Fifteen Thousand Dollars on the 31st January, 1990, for which the Borrowers hereby assume joint and several responsibility for repayment, together with accrued interest for the period of the loan, at the rate of interest charged by the Commonwealth Bank of Australia for overdrafts in excess of One Hundred Thousand Dollars ($100,000.00).
The loan is subject to repayment on demand by the Lender, giving to the Borrowers, seven (7) day’s (sic) notice of requirement to repay the loan together with all outstanding interest in accordance with the above provisions.
The Borrowers further jointly and severally acknowledge and assume personal responsibility for the payment of all invoices rendered by the Lender in his capacity as accountant to Roman Elgin & Associates Pty. Ltd. so as to include those invoices unpaid as of this date and further for those invoices which may be rendered to Roman Elgin & Associates Pty. Ltd. in the future.
The document was signed by Mr Roman Elgin and Mr Marcus Elgin on that day. In 1995, $10,000 of the amount owed by the Elgins to Mr Morton was repaid. From 1996 onwards, Mr Morton attempted to recover the unpaid balance of the loan.
He wrote letters to Marcus Elgin on 31 January 1996 and 30 January 1997, and to Roman Elgin on 28 July 1997. In these letters he referred to his friendship with the Elgins and appealed to them to repay the money they owed him. In the letter of 31 January 1997 he said:
You both know me well and I am sure you would rather come to an accommodation rather than face this ongoing indignity of having me bringing the matter to your attention from time to time. This was never a commercial transaction, but assistance given to friends who asked for help that they needed desperately. I didn’t let you down. Now I am being ignored.
In his letter of 28 July 1997 he said that ‘when called upon as a friend in 1990, I responded to your financial needs and advanced you $40,000. This was a very considerable event for me and represented a major portion of my liquid assets.’ Later in the letter he said ‘the financial interests of myself and family are as important to me as yours are to you. What would you do in my place if you had lent a friend money and he did not repay it?’
The judgment below
In the proceedings below, the respondents denied the alleged oral loan agreements and denied receiving the loan. They also denied executing the written agreement. Alternatively, they said that if the loan agreement recorded a loan it was not supported by consideration or was statute-barred. They further claimed that they had repaid an additional $10,000 of the debt. They counterclaimed for rectification of the loan agreement to reflect the terms they said reflected their agreement, or alternatively for rescission of the agreement on the basis of common or unilateral mistake.
Her Honour preferred the evidence of the appellant to that of the respondents on all of these matters. She held that the loan had been made, that the respondents had signed the loan agreement, that only $10,000 of the loan had been repaid, and that the debt was not statute-barred. Accordingly she held that the respondents were liable to repay the loan together with simple interest.[1] However, her Honour rejected the plaintiff’s claim that the agreement required the Elgins to pay compound interest on the loan. She gave two reasons for doing so.
[1]The learned trial judge held that relevant rate of interest between 9 January 1990 and 1 June 1992 was the ‘readily ascertainable standard rate of interest in relation to local overdrafts in excess of $100,000’, and thereafter the ‘readily ascertainable “Overdraft Interest Rate”… plus a standard margin of 1.75%’. See Morton v Elgin-Stuczynski [2006] VSC 279, [86].
First, ‘[t]he Loan Agreement was made between the individuals, in circumstances where the monies were not available from the defendants’ bankers, because of REA’s financial difficulties.’[2] Mr Morton’s correspondence attempting to recover the loan showed that he had himself characterized the loan as a transaction between friends, rather than a commercial transaction. Because the loan was not a commercial one, there was no basis for implying a term requiring payment of compound interest.[3]
[2]Morton v Elgin-Stuczynski [2006] VSC 279, [90].
[3]Ibid. Her Honour relied upon Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981–2) 149 CLR 337, 347 (Mason J).
Secondly, her Honour relied on the fact that:[4]
The loan agreement term sets the rate of interest with reference to that charged by the Commonwealth Bank but did not require its calculation in accordance with banking practice as was the case in Saunders v Nash[5].
[4]Ibid [91] (emphasis in original).
[5][1991] 2 VR 63.
In that case Vincent J (as he then was) held that an oral agreement that a loan was to be made ‘on the same terms and conditions and at the same interest rate which was being applied by banks at the time’ required the debtor to pay compound interest.[6] Her Honour said that because there was no reference to ‘banking conditions’ in the loan agreement between the appellant and the respondents, the interest rate provision should be construed as meaning that the defendants undertook to pay interest calculated as simple interest.
[6][1991] 2 VR 63, 65-66 (Vincent J).
Grounds of appeal
In essence the grounds of appeal allege that her Honour was wrong in finding that the terms of the loan agreement, when read in the light of surrounding circumstances, required interest to be calculated as simple interest. It was alleged that the loan agreement should have been interpreted consistently with the decision in Saunders v Nash which held that a loan agreement required interest to be compounded. It was also alleged that her Honour did not give adequate weight to the evidence of Mr Bryan Hateley, a Branch Manager with the Commonwealth Bank for about 10 years until 1995, who testified that the interest rate applicable to overdrafts was calculated on the balance of the account on a daily basis and added to the account at the end of each quarter on a compounding basis.
Counsel’s submissions
Counsel for the appellant contended that the words of the loan agreement required payment of interest on a compound basis. Her Honour’s view that the reference to the ‘rate of interest payable on loans in excess of $100,000’ did not require interest payable on the loan to be compounded was inconsistent with the interpretation of the clause as a whole, read in the light of admissible evidence as to the surrounding circumstances.
Counsel submitted that because it is common knowledge that banks charge compound interest on loans, the reference in the agreement to the rate of interest charged by the Commonwealth Bank of Australia meant that interest should be compounded. Further, this interpretation of the provision was consistent with the decision in Saunders v Nash.[7] Counsel for the appellant also relied on decisions holding that loan contracts with banks include an implied term requiring compounding of interest.[8]
[7][1991] 2 VR 63.
[8]Reference was made to Yourell v Hibernian Bank Ltd [1918] AC 372; Paton v Inland Revenue Commissioners [1938] AC 341; Bank of New South Wales v Brown (1983) 151 CLR 514; National Bank of Greece SA v Pinios Shipping Co No 1 [1990] 1 AC 637; Jalmoon Pty Ltd v Bow (Unreported, Supreme Court of Queensland Court of Appeal, 5 September 1997); Alington Group Architects v Attorney General and Ministry of Foreign Affairs [1998] 2 NZLR 183; Kitchen v HSBC Bank Plc [2000] EWCA Civ 12; Kerr v Nationwide Building Society [2002] EWCA Civ 116; Habib Bank Limited v Central Bank of Sudan [2007] 1 WLR 470.
In Saunders v Nash Vincent J explained the historical origins of the rule that banking practices require the payment of compound interest. In doing so, Vincent J referred to the case of National Bank of Greece SA v Pinios Shipping Co No 1[9] where Lord Goff explained this term in banking contracts as arising from a practice historically used by banks to avoid the operation of the usury laws, which made a requirement to pay compound interest illegal. Despite the prohibition of usury, courts were prepared to treat banks as making a fresh advance of an amount equivalent to interest at the end of each year or half year and adding it to the capital sum repayable by the borrower. This practice continued after the usury laws were repealed.[10]
[9][1990] 1 AC 637.
[10][1990] 1 AC 637, 675-685. At 681 Lord Goff quoted from the judgment of Lord Romer in Commissioners of Inland Revenue v Lawrence, Graham and Co [1937] 2 KB 179, 192.
Vincent J explained:[11]
The applicant undertook to pay interest on the basis of the then current banking practices. The compounding of interest had long been recognised by the courts as one of those practices. Although in today’s banking world, where following the adoption by governments of a policy euphemistically described as “deregulation”, the certainty that banks would conform to particular lending practices must have diminished to a degree, there is nothing before the court, nor would it appear that there was anything before his Worship, to suggest that even at the present time this would operate to deny to a banker compound interest on a debt owed by a client. Certainly I consider that his Worship would have been entitled to find that in 1976, when the contract was entered into, banking practices would have been well established in this respect.
[11][1991] 2 VR 63, 66.
Counsel submitted that similar reasoning must apply to a loan contract which referred to the rate normally charged by the Commonwealth Bank. It was also submitted that the use of the words ‘accrued interest’ meant that interest was to be compounded, because the word ‘accrued’ required interest to be added to the amount owing and then recalculated. It was said that the word ‘accrued’ would have been surplusage if the parties had only intended that the respondents should pay simple interest on the amount owing. The only purpose in using that word was to indicate the manner in which interest was to be calculated.
Finally, counsel for the appellant said that her Honour may have relied on letters written by Mr Morton after the loan was made, as indicating the personal nature of the relationship between the parties. It was submitted that if this was the case, such reliance would be in error because such evidence was not admissible under the parole evidence rule. Counsel further submitted that in any event, the existence of a personal relationship would not displace the parties’ intention that compound interest should be payable under the loan.
Counsel for the respondents submitted that cases holding that banks were entitled to compound interest were distinguishable because the lender, Mr Morton, was not a banker but a private individual. The reference in the loan agreement to the ‘rate of interest charged by the Commonwealth Bank’ clearly referred only to the percentage interest rate and not to the basis on which interest should be calculated. Thus her Honour had correctly distinguished Saunders v Nash on the basis that the oral agreement in that case referred to both the rate and interest and the conditions of a bank loan.
Counsel also submitted that the conclusion that the appellant was entitled to compound interest could only be reached by implying a provision in the loan agreement requiring the interest to be payable on the terms and conditions of a Commonwealth Bank loan. The court could not imply such a term into the contract because it was unnecessary to do so in order to give it business efficacy.[12]
[12]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337.
Further, the use of the words ‘accrued interest’ did not mean that compound interest was payable, but simply referred to ‘interest owing’. The effect of the agreement was that if seven days’ notice was given requiring payment of the loan the amount would have to be paid with ‘outstanding’ or accrued interest. This was confirmed by the reference to ‘outstanding interest’ elsewhere in the agreement.
Counsel for the respondent also submitted that the Court could take account of the circumstances in which the loan was made in order to determine the meaning of the interest clause in the loan agreement. As her Honour had said, the loan was not made to the company, REA, but to the Elgins personally. Mr Morton‘s letters were admissible as evidence of the circumstances which existed when the loan was made. The appellant had himself confirmed the non-commercial nature of the loan by referring in letters to the fact that the agreement was made between friends and by the reference in the agreement to a ‘private loan’.
Conclusion
In my opinion the words of this contract are capable of bearing the meaning that either simple or compound interest is payable. Although both counsel relied on case law in support of their submissions, a comparison of the meaning which courts have given to the words used in other contracts of loan provides little assistance in interpreting the words used in this particular contract. Whether interest is to be calculated on a simple or compound basis depends on the true construction of the contract, read in the light of surrounding circumstances.
Whatever may have been the case historically, today there is no presumption that interest payable on a loan made by a private lender is to be calculated as either simple or compound interest. In Alington Group Architects Ltd v Attorney-General the New Zealand Court of Appeal said that:[13]
The question whether the interest payable … is to be simple or compound interest is to be approached without reference to any predisposition the Courts may have demonstrated in favour of simple interest as against compound interest. It is purely one of contractual interpretation. The agreement is to be interpreted so as to give effect to the meaning intended by the parties. Hence, any … “presumption” in favour of simple interest is out of place in determining the meaning of the words in issue.
[13][1998] 2 NZLR 183, 189.
As I have said, counsel for the respondent submitted that a term requiring interest on the loan to be compounded required the implication of a term to this effect into the contract. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[14] the High Court refused to imply a term into a construction contract that if the construction company was restrained by injunction from carrying out the work in the shifts it had planned, the State Rail Authority would indemnify it against the additional costs it incurred as a result of being unable to run working shifts between 10 pm and 6 am.
[14](1981) 149 CLR 337.
Mason J said that a court could only imply a term into a contract to give it business efficacy, and that it was not sufficient to show that it would be reasonable to imply the term. He said:
The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties’ actual intention; the implication of a term is designed to give effect to the parties’ presumed intention.
For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.
The respondents contended that it was not necessary to imply a term into the loan agreement requiring payment of compound interest in order to give it business efficacy.
In Codelfa Mason J said that ‘in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it.’
The distinction between simply interpreting an ambiguous term in a contract and implying a new contractual term in order to give business efficacy to an agreement is not always clear-cut.[15]
[15]Indeed, this may be an example of the kind of judicial reasoning described by Professor Julius Stone as involving converging categories which are a form of category of illusory reference. See Julius Stone Legal System and Lawyers’ Reasonings (1964) Chapter 7, particularly 245-252.
In McCormick v Riverwood International (Australia) Pty Ltd, Weinberg J said: [16]
The actual terms of a contract are those which the parties intended to incorporate in that contract. They comprise the terms expressed by the parties as well as terms which it must be inferred were intended though not expressed. The law may infer such an intention from the nature and context of the transaction. The difference between inferred terms based on actual intention, and implied terms based on presumed intention is not always easy to discern - see Hawkins v Clayton (1988) 164 CLR 539 at 570 per Deane J; Breen v Williams (1996) 186 CLR 71 at 91 per Dawson and Toohey JJ. Particular terms will be considered in the light of all of the facts which bear upon their meaning.
[16](1999) 167 ALR 689, [78] 702-703.
Likewise the learned authors of Cheshire and Fifoot’s Law of Contract state:[17]
Although implied terms are, by hypothesis, terms which were not actually agreed by the parties, the border between actual and implied terms cannot be precise. This is so in part because the actual terms of a contract comprise not only the terms expressed by the parties, but also unexpressed terms… The truth is that in many cases the court, in interpreting the meaning of the words of the parties, in effect adds to them, although its conclusion is expressed in the language of exegesis rather than of implication.
[17]N Seddon and M Ellinghaus Chesire and Fifoot’s Law of Contract (8th Australian ed, 2002) 414.
Although there may be a conceptual difference between the implication of a term where the parties have not directed their minds to a situation which later arises and the conventional process of contractual interpretation, in practice this distinction will sometimes be a question of degree rather than one of kind.
In my opinion this is a case where the court was called upon to interpret the relevant term, rather than to decide whether a term could be implied into the contract requiring interest to be compounded. The reference in the loan agreement to ‘the rate of interest charged by the Commonwealth Bank of Australia’ is capable of being interpreted as requiring payment of interest on either a compound or a simple interest basis. Counsel’s submission that compound interest is only payable if a term to this effect can be implied reflects the assumption that simple interest is payable, unless the contract specifies otherwise. However, as I have said, there is no such presumption. Rather this is a case of ‘orthodox construction of a contract’[18] according to its terms.
[18]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337, 347 (Mason J).
As both counsel acknowledged, the parol evidence rule restricts the admission of extrinsic evidence to determine the meaning of the loan agreement. As Mason J commented in Codelfa:[19]
The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument.
[19]Ibid (citations omitted).
However the parol evidence rule does not exclude evidence of surrounding circumstances to assist the court to construe the contract. In Codelfa, Mason J summarised the law as follows:[20]
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
[20]Ibid 352-353.
Brennan J said that:[21]
The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used. “The time has long passed”, Lord Wilberforce said in Prenn v. Simmonds, “when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations”. Both the internal and extrinsic context in which a word or phrase is used may throw light upon the meaning with which the parties must be taken to have used it, though an extrinsic fact known to only one of the contracting parties can shed no light upon the meaning with which that word or phrase was used by the other or others.
When the court picks up a written contract in order to construe the writing, it must “place itself in thought in the same factual matrix as that in which the parties were” as his Lordship said in Reardon Smith Line v. Hansen-Tangen. But, having construed the writing, the court cannot take its pen and add a clause merely because it thinks the addition would be reasonable or fair or prudent.
[21]Ibid 401 (citations omitted).
The words of the contract were ambiguous, because it was not clear whether the contractual term provided for payment of simple or compound interest. In my view, the reference to ‘accrued’ interest is neutral. It is therefore appropriate to take account of ‘the objective framework of facts within which the contract came into existence’[22] in interpreting the relevant clause in the loan agreement.
[22]Ibid 352.
In my opinion, the intention of the parties, viewed objectively in the light of the circumstances in which the loan was made, was that interest should be compounded. The loan agreement was not drafted by lawyers who might have appreciated the difference between a provision relating to the rate of interest and the manner in which interest was to be assessed. In my opinion a reasonable bystander would have assumed that the reference to the Commonwealth Bank’s rate of interest meant that interest was to be assessed and paid on the same basis as it would be assessed and paid on a bank loan.
As I have said, counsel for the appellant submitted that the letters in which Mr Morton referred to his friendship with the Elgins were inadmissible because they were written after the loan was made. In my view these statements were admissible as evidence of the context in which the loan was made.[23] In any event, Mr Morton gave similar evidence as to the friendly nature of the relationship between the parties in cross-examination. For example:
[23]See paras [39]-[41] above.
Counsel:Mrs Elgin will say that you were a friend of the Elgin family. This is in paragraph 3 of her statement. You would lunch with the Elgins when you visited the office. Is that correct?
Mr Morton: Yes, indeed.
….
Counsel:[Mrs Elgin] will say that when she left with her … children … [for Saudi Arabia] – “We all kissed and hugged each other”. Do you recall that?
Mr Morton:That is possible. We were all very friendly. We had a very good relationship at the time.[24]
[24]Although this relates to the period in the early 1990’s after the loan was made, it is evidence of the continuing friendly nature of the relationship.
However these statements, and the fact that the parties had a friendly relationship, do not require the conclusion that the loan agreement required payment of simple interest. While the loan may well have been motivated by Mr Morton’s concern for the Elgins, he also had a professional relationship with them in his capacity as their accountant.
Another factor which might be thought to support the respondents’ case is that the loan was made to enable the Elgins to avoid their immediate financial difficulties. In these circumstances it might be contended that only a short term loan was contemplated and hence that it was likely that the parties intended that only simple interest would be payable.
But in my opinion the other circumstances which existed when the loan was made provide strong support for the appellant’s claim to compound interest. When the loan monies were advanced to the respondents they knew that Mr Morton was withdrawing them from his two companies and his family trust. The respondents had previously sought an extension of credit from their banker, ANZ, and from other banking institutions and must have known that banks charge compound interest on loans. Mr Marcus Elgin accompanied Mr Morton to his bank at the time Mr Morton drew funds from his accounts. He knew that Mr Morton had insufficient funds in one of his companies to make up the full $25,000 in the first advance and that this amount was drawn from two different sources. The respondents would also have been aware that the appellant would have had to pay compound interest on any indebtedness to the bank.
Having regard to these circumstances, I consider that the loan agreement, viewed in the context of extrinsic circumstances, required the respondents to pay compound interest. The reference in the agreement to ‘a private loan’ does not detract from this conclusion. It simply refers to the fact that the loan was made to the Elgins personally, rather than to REA.
I would therefore allow the appeal and order that the respondents repay the loan together with compound interest, calculated in accordance with the relevant Commonwealth Bank practice, at the rates specified in the schedule to the reasons for decision of Williams J.[25]
[25]Morton v Elgin-Stuczynski [2006] VSC 279, 26 “Schedule of Applicable Interest Rates”.
KELLAM JA:
I have had the advantage of reading the judgment of Neave JA in draft and agree that the appeal should be upheld. I do so for the reasons stated by Neave JA.
CAVANOUGH AJA:
I agree with Neave JA.
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