Narni Pty Ltd v National Australia Bank Ltd
[2001] VSCA 31
•30 March 2001
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 6281 of 1992
| NARNI PTY. LTD. | Appellant |
| v. | |
| NATIONAL AUSTRALIA BANK LIMITED | Respondent |
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JUDGES: | TADGELL, BUCHANAN and CHERNOV, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 31 January and 1 February 2001 | |
DATE OF JUDGMENT: | 30 March 2001 | |
MEDIUM NEUTRAL CITATION: | [2001] VSCA 31 | |
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BANKS AND BANKING – Cheques regularly honoured despite customer’s habitually exceeding approved overdraft limit following regular and persistent warnings that account must be contained.
CONTRACT – Implied terms – Whether term to be implied that cheques should not be dishonoured on the ground that debit balance of account exceeded approved overdraft limit.
DAMAGES – Whether bank liable to compensate for loss of future profits following failure of customer’s business attributable to bank’s dishonour of cheques.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr R. McK. Robson, Q.C. and Mr E.P. Fennessy | Slater & Gordon |
| For the Respondent | Mr G.H. Garde, Q.C. and Mr M.E. Mulvany | Russell Kennedy |
TADGELL, J.A.:
The appellant unsuccessfully sued the respondent for damages, alleging breach of an agreement between them made as banker and customer. The learned trial judge found the respondent to have been in breach of an implied term of its agreement with the appellant, but found further that the appellant had not proved any compensable loss resulting from the breach. The respondent raised a set-off (but not a counterclaim) equal to the debit balance of the appellant’s account, which the judge found to be some $78,682 at 1 July 1998. This, however, became practically irrelevant in view of the failure of the appellant’s claim; and in effect there was simply judgment for the respondent with costs. Hence this appeal. The respondent seeks to support the conclusion that the appellant proved no compensable loss but by notice of contention seeks also to uphold the judgment on the footing that the judge erred in finding that a term should be implied.
The appellant’s claim was variously and discursively pleaded. The gist of it was that the respondent, having agreed to provide an overdraft facility upon a current account in order to assist the appellant in its business, impermissibly withdrew the facility by summarily dishonouring a number of cheques, thereby precipitating a failure of the business and its sale on behalf of a debenture holder. The appellant itself was later placed in liquidation and it remains subject to a deed of company arrangement.
The appellant was incorporated in September 1986. Its guiding spirit was Narni Bonita McCarthy, assisted by her sister, Norma Estrada Caringal, both Philippine-born registered nurses, who were directors and principal shareholders. The appellant’s only business, so far as is now relevant, was that of a 70-bed private nursing home which it purchased for $840,000 by agreement dated 3 August 1987. The purchase was financed almost entirely by borrowings. The appellant conducted the business at rented premises at 440 Station Street, Carrum of which it took possession at about Christmas 1987.
The business traded at a loss of $22,165 in the first six months of its operation to 30 June 1988; and in the second six months it made a profit of $46,354. By the end of 1988 the appellant’s assets were almost all funded by loans, amounting to $896,165 and, as will appear, the business did not survive beyond the next six months.
Typically for enterprises of its kind, the appellant’s business in 1988 and thereafter derived the bulk of its income – some 80% of its income overall– from the Commonwealth Department of Health and Community Services. Payments were made to it by the Department at an average rate of about $150,000 a month. Usually, the Department made a substantial payment, called an “automatic payment “, at the beginning of a month, ranging from about $90,000 to $124,000, (calculated by reference to the numbers and various recognised categories of inmates, or clients, who were classified according to their level of need) and a so-called “final payment” about a fortnight later. Expenses, on the other hand, tended to be incurred throughout the month, including wages – constituting some 62% of all outgoings in 1988 – payable fortnightly. Cash flow therefore presented a constant problem and Mrs McCarthy was in frequent touch with Mr C.W. Kealy, the manager of the respondent’s Elwood branch where the appellant kept a trading account. According to her evidence she asked him early in 1988 for an overdraft facility but he said she should wait and see how things developed. In the event no such facility was approved in terms before June 1988. Nevertheless, the account was often, and indeed commonly, in debit as a result of the respondent’s honouring cheques drawn by the appellant upon it despite an insufficiency of funds to meet them. As the judge found, a cyclical pattern emerged in the conduct of the account during the first six months of 1988. The account was nearly always in credit at or near the beginning of each of those months but was always substantially overdrawn by the end of each month; and generally it went into debit progressively earlier in each passing month. The problem was exacerbated when sometimes automatic payments from the Department were late.
It was, as the judge observed, a remarkable feature of the account that the branch manager allowed substantial and regular debit balances to accrue throughout the period before any overdraft facility had been approved. Mrs McCarthy swore that the manager repeatedly refused her requests for a facility of $100,000, saying that he would support the account ― presumably pending the making of some formal arrangement. Mr Kealy was not available to give oral evidence because of ill-health, and what Mrs McCarthy attributed to him could not be verified. There was, however, evidence from his assistant regional manager that a branch manager had no authority to permit an account to exceed its approved limit. In the circumstances the judge, relying in part on the manager’s diary entries that were put in evidence, was unwilling to conclude that he made any arrangement with Mrs McCarthy that amounted to a dereliction of his duty to his employer; and he rejected so much of her evidence as suggested the contrary. In June 1988 the appellant made a formal written application for overdraft accommodation and Mr Kealy, after taking a guarantee for $65,000 from Mrs McCarthy and her sister as directors, did informally authorise a temporary limit of that amount pending its formal authorisation. His Honour concluded that during most of the second half of 1988 Mr Kealy and his regional manager were content to permit the account to be overdrawn even beyond the temporary limit; and that, for her part, Mrs McCarthy was content to obtain as much credit as the manager was prepared to tolerate.
It seems that formal approval of an overdraft facility of $65,000 was notified to the appellant in November 1988, but thereafter the account was habitually ― although not constantly ― in debit for much greater sums. At the end of January 1989 the account was some $96,000 in debit and, although a payment by the Department brought it into credit for a few days early in February, it soon went into substantial debit and was seldom thereafter within the formally authorised limit. Thus, the account was in debit at the end of February for $127,464 and at the end of March for $173,961. Despite payments from the Department in March, April and May 1989, the account was, so far as appears, not in credit in those months and was by the end of May $174,568 in debit.
According to Mr Kealy’s diary he was in frequent contact by telephone, and sometimes face to face, with Mrs McCarthy, and with her sister, who was concerned also in the conduct of another nursing home at Hallam, through an associated company that was also dependent on the respondent for financial accommodation. The dealings between the respondent and the appellant were, as the judge noted, most informal with no communication in writing. Specifically, as the judge found, Mr Kealy warned Mrs McCarthy in 1989, on 4 and 27 January and on 31 March and possibly on 1 February, of the need to contain the appellant’s account within the formally approved overdraft limit. Indeed, there was evidence before the judge indicating that it was common ground that Mr Kealy’s remonstrations with Mrs McCarthy were regular and persistent. If the respondent’s failure to act on its own warnings be thought remarkable, the appellant’s neglect to heed them was no less so; but both sustained a measure of galvanization when in June 1989 the respondent determined to act. I quote from a written statement made by Mrs McCarthy that found its way into evidence before the judge ―
“On or about 7th or 8th June, 1989, Kealy rang and advised that his superiors required him to write a letter to get our account in order. He warned that cheques would be dishonoured if this was not done. Although I requested him to increase the overdraft instead, I didn’t place a great deal of emphasis on the warning because he had previously said the same regularly.”
On 5 June 1989 an automatic payment from the Department of $113,642 was received, taking the account to $51,388 in debit, and so leaving very little leeway for the rest of the month ahead. As the judge noted this was, save for April 1989, “the worst opening balance on any cycle”, but it was held within the approved limit until 7 June. Presentation of a number of wages cheques in respect of which the account was debited on 8 June took it to $89,616 in debit. The respondent dishonoured some of these on 9 June by reversing the debit entries; and in the succeeding week or two it dishonoured some others as they were presented or re-presented. Counsel for the respondent explained that decisions to dishonour were made from day to day with a view to maintaining the debit balance within the approved limit of $65,000; and it was suggested that the selection of cheques for dishonour was made to ensure, so far as possible, that wages cheques were paid. As the judge found, the result was that the account was restrained within a limit of about $80,000 in the period from 8 to 21 June. Had all dishonoured cheques been paid, the debit balance of the account would have stood at somewhat more than $110,000. On 22 June a delayed final payment from the Department reduced the debit balance to about $71,000.
The dishonour of wages cheques, in particular, caused clamour among the payees, leading to the serious consequences that I have mentioned in [2]. On 22 June a debenture holder appointed an agent who soon sold the business, whereby the appellant was brought to the ground, giving rise to the allegation that what was done by the respondent was in breach of contract for which damages were payable. In its statement of claim the appellant alleged, first, an express agreement by which the respondent undertook to provide the necessary finance for proposed renovations at the nursing home. The judge declined to find that any such agreement had been made. An alternative allegation, as pleaded, was that the respondent breached a term to be implied from the parties’ course of conduct that the overdraft accommodation be varied “to a limit of at least $100,000”. His Honour also rejected that contention but concluded that the conduct of the parties justified the implication of another term in their contract and that the respondent breached it. This conclusion rendered unnecessary a consideration of a further alternative claim founded on estoppel.
The implied term that learned judge was prepared to find was neither one that had been pleaded nor, according to the assertion of counsel for the respondent in this Court, one that had been the subject of argument below. As his Honour expressed it, he concluded that it was a term of the “arrangement between the Bank and Narni that the Bank would not refuse to honour cheques drawn by it on the ground that the balance of the account exceeded the approved overdraft limit of $65,000.”
In reaching that conclusion his Honour recognised that, conventionally, a contract between banker and customer obliges the bank to honour a cheque drawn on its customer’s account only when funds are available to cover it unless an agreement, express or implied, entitles the customer to require the bank to act otherwise. The received law is succinctly stated in a passage in Paget’s Law of Banking[1] which the learned judge cited, thus ―
”A banker is obliged to let his customer overdraw only if he has agreed to do so or if such agreement can be inferred from a course of business; borrowing and lending are a matter of contract, express or implied.”
It is a corollary that the extent to which the bank provides overdraft accommodation is in its discretion. The point is emphasised in this case by the terms of a Notice of Authority to Transact Banking Business, addressed to the respondent and signed on behalf of the appellant on 6 November 1987 when the account was opened. This document, a printed pro forma prepared by the respondent, was filled out in handwriting on behalf of the appellant by way of notification to the respondent that (so far as is now relevant) authority had been duly given to the individual persons named therein “to sign…or make arrangements with you regarding cheques…and to overdraw the account[/s] to any extent permitted by the Bank”.[2] In other words, the document acknowledged that any overdraft facility was to be at the Bank’s pleasure. The learned judge paid special heed to this document but appears unfortunately to have misapprehended it: his Honour evidently treated it as conferring authority on the Bank to “make arrangements” etc., whereas that was not the purport of the document at all. Moreover, the document stated: “Should the said authority be terminated you will be notified in writing by the Company.” Notwithstanding the three last words of that sentence his Honour appears, as I understand his reasons, to have treated the document as requiring the Bank to give notice of termination of its authority. With respect, this was quite incorrect. The terms of the document and its nature, as the learned judge understood them, appear to some extent to have influenced his conclusion, perhaps unwarrantably, as I shall indicate.
[1]11th ed, (1996), 167.
[2]The document did also authorise the Bank to deduct from the account any applicable bank or government charges or taxes paid or payable by the Bank relating to the use of the account, but that authority (which was the only authority that the document conferred on the Bank) is beside the present point.
The judge regarded the parties as having conducted their business and arranged their affairs, at least from February 1989, on the footing that the approved overdraft of $65,000 was at best a nominal limit and that the respondent would tolerate surges well in excess of it in each monthly cycle. His Honour observed that, in a diary note of an interview with Mrs McCarthy on 27 January 1989, Mr Kealy recorded that he told her he would tolerate her exceeding the $65,000 limit only when and to the extent that a government cheque was expected which would be “sufficient to cover plus enough to cover for the following month”. His Honour accepted that Mrs McCarthy was told as much but expressed himself to be satisfied that “this was to be applied in a very flexible way in the following months”; and that the parties “operated and permitted the account to operate in a very flexible way” so that monthly surges far exceeded the authorised limit. The learned judge mentioned in his reasons a diary note of Mr Kealy’s dated 31 March 1989 recording a warning given to Mrs McCarthy but did not refer in terms to its content. This was specific and is worth quoting ―
“Accounts are again short of funds, and the short fall toward the end of each month becoming larger. Soon the short fall will be more than the amount expected for the coming month. If the present trend continued, cheques would have to be dishonoured. Made this quite clear to Narni.”
The mention in that note to “accounts” was a reference to the appellant’s account and to the account relating to the Hallam nursing home, both of which were in trouble, apparently for similar reasons. The judge was, as he said, comfortable in acting on the manager’s diary notes as historically accurate; and it seems clear that his Honour was satisfied that the warning was given to Mrs McCarthy as the diary note records, on or about 31 March, when the debit balance of the appellant’s account exceeded $170,000. There was no evidence, however, of any similar warning given to the appellant after that date, a circumstance heavily relied on by the appellant both in this Court and below, and evidently influential in his Honour’s conclusion.
The appellant in this Court sought to uphold the implication of a contractual term in the form in which the learned judge expressed it, addressing no argument with a view to maintaining any term, express or implied, of a kind that his Honour rejected. Nor was any argument addressed to this Court in reliance on any doctrine of estoppel. That being so, the threshold question for us is whether, upon the evidence (which was the subject of little or no contest in this Court) there was justification as a matter of law for the implication of the term that his Honour found. With due respect, I am of the clear opinion that there was not.
After citing authority on the nature of financial accommodation by way of bank overdraft, his Honour approached in two stages the question whether a term should be implied. The first was to ask whether, when the respondent first moved to dishonour the appellant’s cheques, there was an “arrangement” between them whereby the former was bound to meet cheques for which the available funds, including the approved facility of $65,000, were insufficient. His Honour explained that he used the term “arrangement” “in deference to the terminology adopted by the Bank itself in its form of authority”. This was a reference to the Notice of Authority to which I have referred in [12]; but I do not understand that the expression “arrangements” that it contains is used in contradistinction to a contract so far as it concerns any overdrawing of the account. There is, in my opinion, nothing in that document derogating from the conventional position that the relationship between the bank and its customer is to be regulated as a matter of contract, express or implied, as the above-cited passage from Paget expresses it. The judge ruled out any express term in favour of the appellant. A claim dependent on contract was therefore left to depend on the proper imposition of a contractual term by implication. So far as appears, however, the judge did not consider whether certain well-established prerequisites to the implication of a contractual term had been satisfied. In this his Honour may have been diverted or misled by the reference in the Notice of Authority to an “arrangement” so as to treat the question as requiring something less than an application of the law of contract. Whatever the reason, I am respectfully of opinion that his Honour misdirected himself: a consideration of the question soon reveals that in this case some of the prerequisites could not be met. The second stage at which the learned judge approached his task – whether the respondent was, as a matter of law, obliged to give reasonable notice determining “the arrangement” – therefore did not arise.
It is trite but nevertheless useful to recall that, as Mason, J. noted (with the concurrence of Stephen and Wilson, JJ.) in Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales[3] the implication of a term in a contract is designed to give effect to the parties’ presumed intention. What his Honour[4] there called “the conditions necessary to ground the implication of a term “ were summarized by the majority in B.P.Refinery (Westernport) Pty. Ltd v. Shire of Hastings [5] thus: “…(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”. Although Codelfa and various other earlier and later decisions of the High Court indicate that the above-quoted formulation of principle may be regarded as authoritative, it is fair to say that some of the five conditions are sometimes seen to be difficult to apply and not always to serve as practical criteria. For example, Aickin, J. in Codelfa[6] suggested that, in approaching “the question whether there is to be a term implied into the contract”, a consideration of the remark of the “officious bystander” postulated by MacKinnon, L.J.[7], from which the condition numbered (3) evidently draws inspiration, is not always helpful or useful; and that “it seems no longer the exclusive means of approaching the question”. The five conditions, although evidently expressed to operate cumulatively, may nevertheless overlap; and in some cases ― I think this is one of them ― a more simplified approach may be appropriate and permissible. Thus, in Marcan Shipping (London) Ltd v. Polish Steamship Co. (The Manifest Lipkowy)[8] May, L.J. remarked –
“For my part, I think that reference to the officious bystander frequently does not assist in deciding whether or not a term is to be implied. Officious bystanders may well take different views depending on which side they happen to be standing. In my judgment it is quite clear from such cases as Liverpool City Council v. Irwin [1997]A. C. 239, that the real basis upon which a term can be implied in contracts such as this is that they are necessary in order to make the contract work.”
In the same case Bingham, L.J. expressed this succinct dictum on the point ―
“I take it to be well-established law that a term will be implied only where it is necessary in a business sense to give efficacy to the contract or where the term is one which the parties must obviously have intended.”
[3] (1982) 149 C.L.R. 337, at 346.
[4]At 347.
[5](1977) 180 C.L.R. 266, at 283.
[6]At 373-4.
[7]In Shirlaw v. Southern Foundries (1926) Ltd. [1939] 2 K.B. 206, at 227.
[8](1989) 2 Lloyd’s Rep. 138, at 142.
Marcan was not a case of banker and customer, being concerned with a contract for the sale and purchase of a sea-going vessel, but I respectfully think that those remarks may usefully be applied here. The approach outlined by May, L.J. appears to me to be entirely relevant, and to apply with emphasis, to a case of the present kind where, as one may readily infer, the agreement between the parties was essentially not a negotiated one. There was no evidence that the agreement had been reduced to writing, or was otherwise of a formal kind, save for the Notice of Authority to which I have already twice referred. It is fair to suppose that many of the terms of the parties’ agreement were left to be inferred or implied by established custom or usage, as indeed the judge implicitly recognised by his citation of the passage from Paget. Both Mason, J.[9] and Aickin, J.[10] in Codelfa referred to the added difficulty in implying a term in a contract whose terms have not been generally the subject of negotiation except, for example, as to price. Here, in other words, the agreement between banker and customer was in effect what Aickin, J.[11] called a “contract of adhesion”, made in all essential respects on the Bank’s terms; and the appellant was, as I should judge, expected realistically on either side to conduct its account on the Bank’s terms.
[9]At 356.
10At 374.
[11] Ibid.
The most recent authoritative consideration of the approach to be taken in applying the five conditions summarized in the B.P.Case to a contract, not being a formal written contract complete on its face, is to be found in Byrne v. Australian Airlines Ltd.[12] McHugh and Gummow, JJ. there observed[13] that –
“…where the contract is not in writing and is oral or partly oral or it appears that the parties themselves did not reduce their agreement to a complete written form, caution is required against an automatic or rigid application of the cumulative criteria identified in B.P…
In such situations, the first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied. Some terms may be implied by established custom or usage… Other terms may satisfy the criterion of being so obvious that they go without saying, in the sense that if the subject had been raised the parties to the contract would have replied ‘of course’…If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied.”
These observations, and a passage in the joint reasons of Brennan, C.J. and Dawson and Toohey, JJ. to the same general effect,[14] are entirely consistent with the earlier dicta in Marcan to which I have referred.
[12](1995) 185 C.L.R. 410.
[13]At 410.
[14]At 422-3.
The term formulated by the learned judge in this case, if incorporated into the banker/customer contract, would appear to preclude the respondent (if it were not to be in breach) from dishonouring any cheque, for whatever amount, on the ground that, if honoured, it would bring the account to a debit balance in excess of $65,000. Applying the simple test suggested by May, L.J. in Marcan, I cannot conclude that that could be regarded, on any reasonable view, as necessary in order to make the banker/customer contract work. An alternative means of saying the same thing is to adopt language found in the condition numbered (2) in the B.P.Case: the contract was obviously effective without it. On that basis alone the term as formulated by the judge cannot properly be implied. A similar approach was evidently taken by Ralph Gibson, J. in Williams & Glyn’s Bank v. Barnes.[15] There, the defendant customer, when sued by his bank to recover the balance of an overdraft account as money lent, contended among other things by way of defence that, through a course of dealing, the bank was obliged to increase the overdraft account on request, or give 12 months’ notice of refusal. The judge held that terms to that effect could not be implied, and for two reasons. First, such terms were inconsistent with express terms on which the overdraft facility had been granted; secondly, they were not necessary in accordance with the principles laid down in The Moorcock[16] and Liverpool City Council v. Irwin[17]. His Lordship held[18] that there was ―
“…no reason for the court to approach consideration of the relationship between a bank and a customer with any hostility to the concept of loans on overdraft being repayable on demand, or repayable at the end of the agreed period of the facility. Contracts between banks and customers are ordinary commercial contracts to be construed and applied according to their terms, and in accordance with a ‘basic principle of the common law of contract…that parties to a contract are free to determine for themselves what primary obligations they will accept’[19]“
Similar sentiments had been trenchantly expressed nearly a century earlier in the Scottish case of Ritchie v. The Clydesdale Bank Ltd,[20] described by Lord Young, in the Second Division,[21] as “ unique, ― altogether unprecedented. The parties could refer us to no case in this country or in England at all resembling it: an action of damages against a bank for not permitting an account to be overdrawn.” After referring to the facts His Lordship continued ―
“I do not understand the proposition otherwise than as an extravagant proposition, the proposition, namely, that any bank or banker is under a legal obligation to permit a customer to overdraw his account. It is ridiculous upon the statement of it, and it becomes only a shade less absurd ― hardly appreciably less absurd ― if you say that the bank or banker had been pleased to allow the customer to overdraw on previous occasions. But to infer a legal obligation from that circumstance, so that the bank should be liable in damages if the favours which had been previously given ― there being no obligation to grant them ― were not continued,― I say that is a proposition only a shade, if indeed it be a shade, less extravagant than the other.” [22]
[15][1981] Com. L. R. 205. The judgment is said to have run to 706 typed pages and the report claims accordingly to be “extremely selective”. A useful summary appears in Banks, Liability and Risk, ed. Cranston (2nd ed., 1995) , 33-6.
[16](1889) 14 P.D. 64.
[17] [1977] A.C. 239.
[18]At 209.
[19]Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827, AT 848, per Lord Diplock.
[20](1886) 13 Rett.866.
[21]At 876.
[22]Ibid.
Counsel for the appellant submitted, as I understood him, that the exact words used by the judge in this case in his formulation of the term that he held was to be implied should not fetter a proper appreciation and application of it; and that it may be that some other words or expressions should be read into it in order give it practical sense. For example, when it was put against him that a literal reading of the term, as the judge expressed it, would require the respondent to honour a cheque of any unlimited amount, unconstrained by any course of dealing, counsel replied that perhaps the word “only” should be notionally inserted, so that the term would read “… the Bank would not refuse to honour cheques…only on the ground” etc. Again, counsel suggested that the term should perhaps be read together with another term to be implied ― or that it should be taken itself to be subject to an implication ― to the effect that it contemplated only cheques drawn in the ordinary course of business, and thus imposing no obligation on the respondent in relation to cheques for extraordinary or fanciful amounts. These contentions cannot be accepted. To advance them is really to concede that the term the appellant seeks to support fails the test that it must be capable of clear expression. It is elementary that a contractual party who is to be subjected to an additional obligation by reason of a term to be implied into the contract should be left in no doubt of the extent of the obligation. The term, or the proposed term, now under consideration would leave the respondent in a state of speculation as to the extent to which it would be obliged to honour, or entitled to dishonour, the appellant’s cheques.
Counsel for the appellant conceded that the respondent had a right to decide whether or not to lend money by way of granting an overdraft facility; and to terminate or modify any such facility at will upon giving reasonable notice. He submitted, however, that the term formulated by the judge is in truth not inconsistent with that right, as was contended for the respondent, for it does not require the respondent to lend money. The submission was that the practical effect of the term is simply to require the respondent to give reasonable notice of its intention to terminate or modify the facility that had been granted; and that the vice in the respondent’s conduct lay in the precipitate way in which the decision to dishonour cheques had been implemented without due notice. The submission does not, I think, properly recognise the effect of the term that the judge formulated. It is no doubt true that the respondent might at any time terminate the overdraft facility and make demand for the debt that would then become due and owing; and the term, as formulated, could not interfere with that. What the term purports to do, however, is to deprive the respondent of an undoubted right to set the limit of its advances to the appellant in terms of time and amount. There is, I consider, no justification for any presumption that the respondent agreed to that. The evidence is altogether to the contrary. Moreover, it is to be remembered that a bank was always obliged as a matter of common usage to decide promptly, upon due presentation of its customer’s cheque for payment, whether or not to honour it by debiting the customer’s account and correspondingly paying the collecting bank. The obligation now has statutory force by reason of s.67(1) of the Commonwealth Cheques Act 1986, which requires a “drawee institution”, where a cheque is duly presented for payment, either to “pay or dishonour the cheque as soon as is reasonably practicable”. If to honour the cheque would leave the drawer’s account in debit beyond an agreed limit, a decision by the bank to dishonour is in effect a decision not to lend the drawer the requisite sum. An implied obligation on the part of the bank to defer such a decision until affording the customer the opportunity to obtain alternative accommodation would scarcely be compatible with practicality.[23]
[23]Cf. Bank of England v. Vagliano Brothers [1891] A.C. 107, at 157, per Lord Macnaghten.
Counsel for the appellant relied on Cumming v. Shand[24] the facts in which, however, readily distinguish that case from this. A bank permitted a customer, a merchant, over a period to incur casual overdrafts within a certain limit without the bank’s formal approval. The customer habitually received overseas consignments of goods for which bills of exchange were drawn against him which he accepted and delivered (with bills of lading annexed) to the bank, which paid them and debited his account with the amount. The bank used to release the bills of lading, thus allowing the goods to be sold by the customer’s broker upon receiving the broker’s undertaking to pay the amount of the bills out of the proceeds. The bank regularly allowed the customer to draw on the account as if the amount advanced on the bills had not been placed to his debit, and for this accommodation charged a commission. On one occasion when he drew a cheque, there being sufficient to the credit of the account to meet it if the amount of certain bills that had been debited to it were disregarded, the bank, without notice to him, dishonoured the cheque. Upon the customer’s claim for breach of contract the trial judge allowed the case to go to the jury for their decision whether the bank‘s practice of allowing overdrawing of the account amounted to no more than an indulgence or whether it amounted to a course of business which could not be terminated without reasonable notice. The jury found for the plaintiff and the Court of Exchequer held that the case had been properly left to the jury. Pollock, C.B. observed ―
“No doubt, if a person had been accustomed to accept bills for the accommodation of another, he may refuse to do so any longer; for there is no tenancy of a man’s credit which requires any time to put an end to it. But that is not the case where a course of dealing has prevailed, and value has been given for the accommodation.”
That case obviously depended on its own facts and, because they were very different from those in the present case, I do not see how it assists the appellant. The amount of the plaintiff’s cheque that the bank refused to honour was within the terms of the accommodation that was alleged to have been provided, whereas in the present case a limit had been stipulated and it was exceeded. Cumming v. Shand is no authority at all for the proposition that, where a bank chooses to allow an overdraft limit to be exceeded, it is necessarily to be presumed thereby to have agreed that it will give special notice of an intention to insist in the future on adherence to the limit. I do not say that such a presumption might never be justified: in some circumstances it might be the only reasonable conclusion; but I cannot see that it could be reasonably open here. Counsel for the appellant sought to distinguish between warnings to the appellant of the risk of the dishonour of cheques, which the respondent admittedly gave, and notice to the appellant of an intention to dishonour particular cheques, of whatever amount, which the respondent did not give. In the circumstances of the case I regard the distinction as unwarrantable, for again I do not consider that the evidence shows that the parties can be presumed to have had an intention draw it.
[24](1860) 5 H.& N. 95; 157 E.R. 1114.
In the result I am of opinion that the respondent should not be taken to have been in breach of its contract with the appellant by dishonouring cheques as it did, and that the proceeding should have been dismissed for that reason rather than on the ground assigned by the learned judge. If, however, I should be wrong in that conclusion, and the dishonour of the cheques should be held to have constituted a breach of contract, I would agree with his Honour’s opinion that the appellant should fail because it proved no compensable loss. I shall state as shortly as may be why I take that view.
Following the dishonour of cheques by the respondent the appellant’s staff threatened strike action. On 22 June 1989 some carried out the threat. On the same day a debenture holder, Visa Credit Pty. Ltd., appointed an agent who took possession the next day and sold the business by agreement dated 17 August for $1.05m together with stock at valuation. The proceeds of sale left no surplus for unsecured creditors or, of course, for the appellant.
The learned judge concluded that the appointment of the agent in possession and the subsequent sale by him of the business were caused in the relevant legal sense by the respondent’s conduct, characterized as a breach; and the appellant claimed damages in effect for the loss of its business. It sought to particularize its loss under 10 heads with a view to justifying a claim, as it was finally presented, of some $8,236,000. The basis for the claim was pared down at the trial until, ultimately, it fell to his Honour to consider an allegation of loss of $6,410,159, the essential foundation of which, so far as is now relevant, was that the respondent’s conduct had deprived the appellant of future profits from the business. Notably, there was no claim for loss of business reputation,[25] or for humiliation or inconvenience.
[25]As was successfully made in, for example, Kpohraror v. Woolwich Building Society [1996] 4 All E. R. 119 following the wrongful dishonour of a cheque.
It was common ground that the price obtained upon the sale of the business represented its fair value, calculated conventionally at a value per bed (in this case $15,000), reflecting the value of the appellant’s licence to operate a nursing home with 70 beds. As the judge found, the value so assigned had regard to the expectation of income derivable from the exploitation of such a licence, thus including the capitalised value of future income of the business and representing the measure of loss flowing from the respondent’s breach. His Honour therefore concluded (accepting the argument for the respondent and rejecting that for the appellant) that, upon the sale of the business, the appellant received its full value as the purchase price, which included the value of its future earnings, applied in reduction of the debt to its secured creditor; and that it had not been shown to have suffered further loss.[26] The appellant’s claim for damages had been put forward in reliance on an analysis of its loss made by its chartered accountant, Mr D.A. Armstrong, that his Honour entirely rejected, finding it to be flawed in its approach and in matters of fact. The analysis had, in substance, attempted to forecast the appellant’s future cash flow during the term of its lease, including options to renew, until January 2000 and beyond, and thus to calculate a measure of compensation for loss of income reasonably expected to be earned during the supposed lifetime of the business of some 11 or more years. I shall not refer further to the analysis save to say that it was naturally complicated and necessarily speculative. One of several criticisms of it relied on for the respondent, with which the judge agreed, was that it purported to assess the measure of damages at the date of the trial (and, I think, even beyond) and not at the time of what the judge had held to be the respondent’s breach. Of that his Honour simply said that “[t]his is not one of those cases where assessment [at] date of judgment is appropriate.” Moreover, the learned judge expressed his agreement with the opinion of the accountancy expert retained by the respondent that the appellant’s business was probably likely to fail in any event.
[26]Waddams, The Law of Damages, (Canada Law Book Inc.) 2nd ed., para. 5.940, discussing compensation for damage to economic interests, recognises that damage to a business interest is sometimes estimated as a capital sum. The author suggests that “… in relation to damage to property, a diminution in capital value of an income producing asset is simply an alternative measure of the potential loss of income”; and contends that”... care is needed to avoid a double compensation. Full compensation for the diminution in capital value of the plaintiff’s business interest is equivalent to full compensation for the estimated loss of profit. The plaintiff cannot have both. Choice of method is a matter of convenience. “
On appeal the burden of the argument for the appellant as to damages was that the judge’s approach to his task of assessment was fundamentally erroneous, namely on the footing that the appellant intended to sell the business; and that his Honour was wrong to have reasoned that, having received a fair sale price, the appellant was entitled to no further compensation. Instead, as it was submitted, the appellant had been entitled to be compensated conformably with the general rule at common law, for which Robinson v. Harman [27] was cited, and in accordance with which there should have been an attempt to place the appellant in the same situation as if the contract had been observed, so far as an award of monetary compensation could do it. Thus, it was necessary to look at the particular circumstances in which the appellant found itself: it wished to conduct its business for many years into the future, not to dispose of it; and damages should have been assessed on the basis that, without the respondent’s breach, the appellant would have continued to operate the business, and at a profit. It was said that the judge was therefore in error in acceding to the respondent’s submission that the sale price of $1.05 m represented the measure of the appellant’s loss; and that his Honour ought to have considered – and failed to consider – whether the loss to it might have been greater than that to someone else or to a member of the general public. Counsel for the appellant relied on some cases[28] concerning the measure of indemnity awardable under policies of loss insurance as illustrating the way in which the courts approach the task of assessing particular loss. He referred also to The Commonwealth of Australia v. Amann[29] as a recent exemplification of the principle for which Robinson v. Harman stands.
[27] (1848) 1 Ex. 850, at 855.
[28]Including, especially, Canadian National Fire Insurance Co. v. Colonsay Hotel Co [1923] 3 D.L.R. 520; Buchanan v. Cook (1958) 11 D.L.R. (2d) 638; Falcon Investments Corporation (N.Z.) v.State Insurance General Manager [1975] 1 N.Z.L.R.520; Pleasurama Limited. v. Sunday Alliance and London Insurance Limited. [1979] 1 Lloyd’s Rep. 389; and Lucas v. The New Zealand Insurance Co. Limited. [1983] 1 V.R. 698, at 701.
[29]1991) 174 C.L.R. 64.
In Amann an award of damages was allowed for so-called “reliance damages” by reference to expenditure reasonably incurred by one of two parties to a contract for the supply of services in the expectation, ultimately disappointed, of performance by the other. The case, like every case requiring an assessment of damages, depended on its own facts; and it does not necessarily authorize an assessment of damages for breach of such a contract on any particular basis, whether “reliance damages”, “expectation damages” or “damages for loss of profits”, although recognizing that each is available in an appropriate case. Neither that decision nor, I think, any of the insurance cases relied on for the appellant, is determinative of the appropriateness of a certain method of assessment.
The general rule, noticed by the learned primary judge, that damages for breach of contract are to be assessed as at the date of breach (or when the cause of action accrues) is not universal: “…it must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered.”[30] The means that will most “fairly” compensate has, of course, to take account of what is fair as well to the defendant as to the plaintiff. In the light of these observations the matter at issue is in my judgment to be resolved by deciding whether the general rule – that damages should be assessed as at the time of accrual of the cause of action – ought to have been applied or not and, if not, what other solution should best be applied by way of compensating the appellant.
[30]Johnson v. Perez (1988) 166 C.L.R. 351, at 355-6, per Mason, C.J. and the cases there cited.
I have no doubt that, in the circumstances revealed by the evidence, the judge was correct to decline to assess damages by reference to an attempted calculation of cash flow for many years into the future made ― at the earliest ― as at the date of the trial. Assessment at a time later than the date of the breach or accrual of the cause of action will be appropriate if, in the circumstances, events occurring after that date are relevant to a determination of what is fair compensation.[31] Events subsequent to breach may, of course, tend to indicate that a loss has been increased or reduced; and it is a corollary of the principle enunciated in Robinson v. Harman that an injured party is not, by an award of damages, to be placed in a superior position than that which would have been occupied had the contract been performed.[32] In the present case counsel for the respondent submitted that the manner of assessment contended for on behalf of the appellant was inconsistent with that principle, and therefore with Robinson v. Harman, and that accordingly there was good reason not to depart from the general rule that damages were assessable at the time the cause of action arose. Counsel for the appellant, on the other hand, claimed to embrace the general rule, but submitted that it can accommodate reference to occurrences subsequent to breach. Of course, the approach contended for on behalf of the respondent (and accepted by the judge) itself relies on taking account of events that occurred some months after the date of the supposed breach ― the sale of the business and distribution of the proceeds. It seems to have occurred to no-one, however, that this represented a departure from principle. It seems to me to have been permissible in any event on the ground that the sale of the business, and the consequences of it, were relevant and appropriate to be considered in a consideration of what was fair compensation to the appellant. So much seems to be conceded for the appellant: initially, Mr Armstrong’s analysis wholly ignored the sale and its proceeds but, in a second calculation made during the trial, he did take some account of them.
[31]The concept is usefully discussed by Professor Waddams in “The Date for the Assessment of Damages” 97 L.Q.R. 445
[32]Amann, at 82.
Counsel for the appellant asserted in this Court that it is an affront to common sense to say that his client suffered no compensable loss, given that its business ― worth over $1 m., and on one estimate was likely over time to increase in value to over $2 m. ― had been ruined as a result of the respondent’s conduct. The assertion takes no account, however, of the satisfaction pro tanto of the appellant’s secured creditor; and in any event confers no validity on the contention that a statement of profits, estimated theoretically to have been lost over a period extending 11 years and beyond after the assumed breach, was relevant and appropriate to a determination of fair compensation to the appellant. In Amann’s Case, on which counsel for the appellant greatly relied, Mason, C.J. and Dawson, J. said[33] ―
“The award of damages for breach of contract protects a plaintiff’s expectation of receiving the defendant’s performance. That expectation arises out of or is created by the contract. Hence damages for breach of contract are often described as ‘expectation damages’. The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff’s expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.”
It is clear to my mind that, although the judge did not in terms refer to the appellant’s failing to sustain its onus insofar as it sought to prove its loss in reliance of Mr Armstrong’s analysis, so much is implicit in his Honour’s reasons. The exercise was essentially speculative: the learned judge obviously found it unconvincing and would not act on it. Quite apart from the matter of the date at which the analysis of loss was made his Honour found figures on which Mr Armstrong based his analysis to be unreliable. He had relied on information that had been provided to him from a variety of sources and he himself conceded in his report dated 15 July 1998 that he had “… not independently confirmed its reliability, accuracy or completeness. In particular, I have not carried out any form of an audit of the Financial Statements or any other financial information on which I have relied and therefore do not express any opinion on the reliability of those statements and that information”. The learned judge found, as one of a catalogue of “justified criticisms” of the evidence relied on and the approach taken on behalf of the appellant, that “The profit and loss figures for the periods 1 July 1988 to 30 April 1989 and 22 June 1989 to 30 March 1990 do not provide a reliable basis for Mr Armstrong’s analysis. Those for the former period were shown to be incomplete and inaccurate and those for the second period in which the agent managed the business are not truly comparable since he was not obliged to pay all creditors as at the date of appointment “. Small wonder, then, that his Honour entirely rejected the case put forward on behalf of the appellant for a method of assessment of damages. Mr Armstrong’s report was shown to be ill-founded, as a matter of fact, to support any serious projection of future profits for a decade or more after the respondent’s assumed breach, even on an assumption (not, as it happened, made good) that such an exercise was otherwise justified.
[33]At 80.
Counsel for the appellant submitted that, despite some criticism that might justly be levelled at Mr Armstrong’s evidence, his approach was basically sound, or had not been shown to be basically unsound, and that the judge had erred in not attempting ― doing his best ― to assess expectation damages by reference to a projection of lost profits. Counsel sought, therefore, a new trial, without fresh evidence, so that an appropriate assessment might be undertaken on what was said to be the correct principle. The submission has no merit. The appellant tied its case for an assessment of damages to a method that, if it could be justified at all, required to be justified by evidence, and it was not so justified. As it was, the judge in assessing damages was, in my opinion, left with no other sensible approach to the task than the one he took.
Relevant error has not been shown and the appeal should be dismissed.
BUCHANAN, J.A.:
I agree that the appeal should be dismissed substantially for the reasons stated by Tadgell, J.A.
In the second half of 1988 the parties expressly agreed that the respondent would honour cheques drawn by the appellant provided that the debit balance of the appellant's account did not exceed $65,000. The issue as to an implied term was essentially whether by their conduct the parties had evinced an intention to vary the express term limiting the overdraft to $65,000. The conduct said to evince that intention was the drawing and honouring of cheques notwithstanding that thereby the debit balance of the account exceeded $65,000.
In determining that issue I have some doubt whether it is helpful to ask whether a new or varied term was necessary to make the contract work or to give it business efficacy. A contract will often work and have business efficacy whether or not an existing term is varied or a new term is imported simply because, prior to the variation, there was a functional contract and usually the variation is one which suits the parties but is not necessary, in the sense in which that word was used in The Manifest Lipkowy[34], to meet altered circumstances.[35] Cases such as Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales[36] and BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings[37] were concerned with ascertaining a "term which it is presumed that the parties would have agreed upon had they turned
their minds to it – it [was] not a term that they .. actually agreed upon."[38] In the present case, on the other hand, the question was whether the parties' conduct disclosed an unspoken agreement to vary the contract.
[34][1989] 2 Lloyd's Rep. 138.
[35]A variation by conduct of the terms of an existing contract will also generally fail the third and fifth tests expressed in B.P. Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1977) 180 C.L.R. 266 at 283.
[36](1982) 149 C.L.R. 337.
[37]Supra.
[38]Codelfa at 346 per Mason, J.
In my opinion the trial judge erred in finding that the express terms of the contract were varied, for the conduct from which an intention to vary the contract was to be implied was inherently ambiguous. The conduct of the parties was as consistent with the existence of a discretion to permit the exceeding of the limit of $65,000 when the bank thought fit as with an agreement to dispense with any limit. Further, as a new term dispensing with any limit required the respondent to honour a cheque for any amount chosen by the appellant, it was hardly likely to have been intended by the respondent. The existence of another limit, such as that each cheque was to be drawn in the ordinary course of the appellant's business, did not emerge from the conduct of the parties. It is not as if the respondent dishonoured cheques not in the ordinary course of business and the appellant accepted such dishonour without demur.
Accordingly I agree that the respondent is not to be treated as having breached its contract with the appellant by dishonouring cheques. I also agree that in any event, assuming a breach of contract to have been established, the appellant did not sustain any loss sounding in damages as a consequence of the breach.
CHERNOV, J.A.:
In my opinion, the appeal should be dismissed for the reasons stated by Tadgell, J.A.
As his Honour has shown, where the parties have entered into an agreement which is partly in writing and partly oral as was the case here, the courts ordinarily do not imply a term in the agreement unless it is established that it is necessary to do so in order to give the agreement a sensible or effective operation having regard to the circumstances of the case or unless it is a matter of obvious inference from the parties’ conduct that they intended that the proposed term should form part of the agreement. Even where the terms are implied as a legal incident of certain kinds of contracts such as between landlord and tenant or an employer and employee, they are implied because it is necessary to do so in order to give the contract due operation (Hawkins v. Clayton[39]; Clarion Ltd. v. National Provident Institution[40]; Liverpool City Council v. Irwin[41]; Lister v. Romford Ice & Cold Storage Co. Ltd.[42]).
[39](1988) 164 C.L.R. 539 at 572-3 per Deane, J.
[40][2000] 1 W.L.R. 1888 at 1897 per Rimer, J.
[41][1977] A.C. 239 at 255-6 per Lord Wilberforce, at 266 per Lord Edmund-Davies.
[42][1957] A.C. 555 at 576 per Lord Simonds.
The agreement between the parties in this case was constituted in part by the Notice of Authority that was completed and executed by the appellant in November 1987. The appellant thereby acknowledged, as his Honour pointed out, that any overdraft facility was to be at the respondent’s pleasure. A year later, the respondent granted the appellant’s request for an overdraft facility, but one limited to $65,000. Thus, at that point, the relevant aspect of the agreement between the parties was that the respondent would honour cheques drawn by the appellant up to an overdraft limit of $65,000. That the respondent intended not to depart from that limit is apparent from its warnings to the appellant between January and the end of March 1989 that it was not to exceed the limit. In the circumstances and notwithstanding the respondent’s tolerance of the appellant exceeding the limit during the first half of 1989, the agreement between the parties that limited the overdraft facility to $65,000 was capable of effective operation in a business sense without the implication of the term found by his Honour. Similarly, in my view, it cannot be said that the conduct of the parties gave rise to the obvious inference that they intended to vary the agreement to include the term contended for.
Moreover, as is evident from the judgments of Tadgell and Buchanan, JJ.A., the term which was sought to be implied was inherently ambiguous and, for that reason also, it could not have been implied into the agreement.
I therefore agree that the respondent did not breach its contract with the appellant by dishonouring the cheques in question. I also agree with Tadgell, J.A. that, in any event, even if it is assumed that breach of contract on the part of the respondent had been established, the appellant did not sustain any loss entitling it to an award of damages in respect of that breach.
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