Parras Holdings & Ors v Commonwealth Bank of Australia

[2000] HCATrans 166

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S68 of 1999

B e t w e e n -

PARRAS HOLDINGS PTY LIMITED

First Applicant

FULANGA PTY LIMITED

Second Applicant

PHONTOS INVESTMENTS PTY LIMITED

Third Applicant

ILANZ PTY LIMITED

Fourth Applicant

P & E PHONTOS PTY LIMITED

Fifth Applicant

DOVIZO PTY LIMITED

Sixth Applicant

PETER PHONTOS

Seventh Applicant

ELLI PHONTOS

Eighth Applicant

HARRY PHILLIP COSTAS

Ninth Applicant

MARY COSTAS

Tenth Applicant

MICHAEL PHONTOS

Eleventh Applicant

SIBARD PTY LIMITED

Twelfth Applicant

SHIMCOST PTY LIMITED

Thirteenth Applicant

SPOTEK PTY LIMITED

Fourteenth Applicant

and

COMMONWEALTH BANK OF AUSTRALIA

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 APRIL 2000, AT 12.35 PM

Copyright in the High Court of Australia

___________________

MR T.M. JUCOVIC, QC:   May it please the Court, I appear with my learned friend, MR R. ALKADAMANI, for the seventh, eighth and twelfth applicants.  (instructed by Castrission & Co)

MR R.G. FORSTER, SC:   May it please the Court, I appear with my learned friend, MR N.L. MANOUSARIDIS, for the respondent.  (instructed by L.E. Taylor)

GLEESON CJ:   Yes, Mr Jucovic.

MR JUCOVIC:   Your Honours, the seventh and eighth applicants were mortgagors and guarantees under facilities to the respondent to a group of companies known as the Phontos group.  They included the first applicant, Parras Holdings and the fifth applicant.

GUMMOW J:   What is happening with the other applicants?

MR JUCOVIC:   They are in liquidation or bankrupt, your Honour.  They no longer pursue the application.  I think they were dismissed.  Your Honour the Chief Justice made, as I understand, an order for their dismissal.

GLEESON CJ:   This was a matter that was in a list before me at the end of last year.

MR JUCOVIC:   Yes.  Your Honours, the seventh and eighth applicants claim their obligations were discharged by reason of breaches of terms and conditions on which they provided their guarantees and securities.  Those terms and conditions were in a facility agreement which required the Bank to provide funding for the development of a development known as Wharf Street.  The discharge for a breach of contract determined the relationship arises because the seventh and eighth applicants were parties to the term sheets which set out the terms of the facilities as well as parties to the mortgages and guarantees.

The breach, your Honours, consisted of the imposition of terms on an existing relationship under threat of non-continuation of those terms and conditions unless there was a variation to the relationship.  The approach taken below and here was to seek to set aside the imposition of such terms and condition under principles of unconscionable conduct and economic duress.  Your Honour, the breaches - - -

GUMMOW J:   Where does this notion of economic duress come from?  Is there any decision in this Court dealing with it?  There is not, is there?

MR JUCOVIC:   No, your Honour.

GUMMOW J:   It is a fairly recent invention, is it not?

MR JUCOVIC:   Yes, your Honour.  It has been approved by the New South Wales Court of Appeal.

GUMMOW J:   Yes, that is right.  That is where it stops, is it not?

MR JUCOVIC:   That is where it stops, your Honour.

GUMMOW J:   But your case rests on an assumption as to its application?

MR JUCOVIC:   Yes, your Honour.  Your Honours, the situation was that no demand for repayment had been made in relation to the facilities which had been granted to the Phontos group of companies.  No demand having been repaid, there was no breach on the part of the Phontos group of companies.  What happened was that the respondents refused to proceed further to provide further advances under the facility which was to finance the Wharf Street property and they refused to process a progress claim.  They refused to do so unless there was an acceptance of two conditions known in the proceedings as the $3 million condition and the Mason conditions.  The $3 million condition was accepted earlier on and the Mason conditions were accepted about a month later.  The Mason conditions, in closed terms, which, accordingly to the applicants, further delayed the applicants’ funding.

Your Honours, the first question which arises in the special leave application is the terms and conditions of the funding.  Your Honours, it could be readily conceded that all but the facility for the funding of the Wharf development known as FCL1 - - -

GUMMOW J:   We have to get to some question of importance, do we not?

MR JUCOVIC:   Yes.

GUMMOW J:   Well, how do we get there?

MR JUCOVIC:   It arises in this way – it is raised in our first question.  I take your Honours to page 284 of the application book, volume 2.  Your Honours will see this was the form of the application for accommodation which was signed in relation to - - -

GUMMOW J:   Yes, I know, but this is, at the moment, entirely transaction specific.  How do we get a general question of importance out of this particular form in this particular case?

MR JUCOVIC:   In this way, your Honour:  paragraph 2(a) provides that the accommodation is granted on:

on such other terms and conditions as the bank may from time to time impose.

Paragraph 2(c) provides that they could vary or limit the accommodation granted. 

GUMMOW J:   This is overdraft accommodation, is it not?

MR JUCOVIC:   This particular one is overdraft accommodation but this form of - - -

GUMMOW J:   One begins with the proposition that the overdraft accommodation is repayable on demand, I suppose, unless there is some specific arrangement modifying that.

MR JUCOVIC:   Yes.  Well, the Full Court determined that this particular document govern the terms of the overdraft accommodation.  Having said that, the question of whether thereby dismissing the applicants’ case that there was another more specific arrangement which required the payment of the overdraft from funding.  The special leave point, your Honours, arises – if I can say it this way – in this way because the way in which they interpreted these terms and conditions seem to be the basis upon which the question unconscionable conduct and economic duress was approached.  Can I take your Honours to page 629 of the application book.

GLEESON CJ:   Just before you get there, page 627, line 32, is that correct?

Neither party submitted that Davies J erred in his statement of the relevant legal principles in relation to unconscionable conduct.

MR JUCOVIC:   That is as I understand it.  I was not there.

GLEESON CJ:   And then on page 634, line 11.  They support the finding of Justice Davies in relation to economic duress.  He, in turn, had said that the findings of fact he made in relation to unconscionable conduct disposed of the argument about economic duress.

MR JUCOVIC:   That is so, your Honour.  Your Honour, what Justice Davies and the Full Court failed to properly take into account, in our respectful submission, is that, at the time, the Bank and not the applicants, the Phontos group of companies, were breach of obligations, yet, in dealing with what amounted to a breach of contract by the respondent, the Full Court and Justice Davies seemed to excuse that breach by saying it was reasonable in the circumstances and apparently on the basis that they had some form of legal right to undertake that conduct. 

If I could just take your Honours to page 629 of the application books.  The Full Court, at line 10, cites Mr Justice Davies’ findings about the:

repudiation of, in the sense of a refusal to proceed further with, the contract on its original terms.

GUMMOW J:   Well, the Full Court dealt with that.

MR JUCOVIC:   Yes, your Honour.  If I could take your Honours to line 35:

In pursuing that course, the CBA was acting in accordance with, and not contrary to, its legal rights in requiring that renegotiation of the terms of the loan facilities was a pre-condition to it forbearing from making demands for repayment.

GUMMOW J:   I know, but you have to go to 631, the first paragraph, do you not?

MR JUCOVIC:   Yes, your Honour, “It may be technically correct”.  But, your Honours, what they are saying at 629 is that they had a legal right at a time when they were breaching the agreement and the applicants, the Phontos group of companies were not in breach to demand the imposition of terms.  But the language used by Justice Davies and the Full Court is that of the imposition of terms.  Your Honours will see that, for instance, at 624, at line 53.  Your Honours see, “The Mason conditions were formulated, and later imposed”, and at 630, at line 42 - - -

GLEESON CJ:   Mr Jucovic, we are going to adjourn.  Is this a suitable time?

MR JUCOVIC:   If your Honour pleases.

GLEESON CJ:   Well then, we will adjourn until 2 pm.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.03 PM:

GLEESON CJ:   Yes, Mr Jucovic.

MR JUCOVIC:   Your Honour, at page 630 the Full Court cites, at line 40, with approval, Justice Davies’ finding that the imposing of the Mason conditions was not unconscionable or in bad faith.  The question that arises, at page 629, it appears that the Full Court has treated as being within the legal right of the respondent to impose new conditions unilaterally and a special leave point arises in this way, that is the extent to which one can have, as a defective condition, a condition that terms and conditions upon which the parties are to contract can be changed by imposition of one of the contracting parties.  Without that basis in S22, your Honours, the Bank form, it would not be the case that the Bank was, at the time, within its legal rights to require the renegotiation of the terms of the loan.

That raises what we would say would be the second special leave point.  The finding is, in effect, based upon a hypothetical, once that is removed, your Honours.  The hypothetical being there was an ability to make a demand, no demand has, in fact, been made, and there has been no threat to make a demand when, in fact, the conduct which is said to be not unreasonable on the part of the Bank, your Honour, is conduct which is the refusal to comply with the Bank’s legal obligations.  So the first special leave point leads to the next special leave point, we would say, that is to what extent in assessing - because that effectively was the Full Court’s approach, your Honours, to the question of unconscionable conduct and economic duress, to what extent it could be said that one can take into account in determining unreasonableness, an unconscionability of facts that have not happened where, in effect, the respondent is breaching its contract or repudiating its obligations at that point of time.

If it had chosen to do so, it could have made the demand, but it did not do so, your Honour.  Its intention to make the demand it was considering.  No one knows what might have happened if the Mason conditions had been refused.  So that the way in which the Full Court approaches, in our respectful submission, the question of unreasonableness and conduct on the part of the Bank, your Honours, is infected by its findings that there can be the imposition of terms and by dealing with the matter as a hypothetical. 

Your Honours, the second way in which the special leave application is put is on the question of consideration.  I will say something briefly about that.  The finding of the Full Court, your Honours, at page 626, line 45, there is a finding that:

the Mason conditions resulted in benefits for the Phontos parties…..the Phontos parties secured further time to repay the loan facilities granted under the Terms Sheet, PEP gained further time to endeavour to clear its overdraft and, in effect, payment of outstanding interest was deferred.  The CBA’s forbearance from exercising its rights in respect of the various loans facilities and under its securities, was a substantial benefit -

The problem with that finding, your Honour, is that that was something not in the minds of CBA and not communicated to the Phontos parties.  There was, in fact, no provision whereby, under the agreements that were signed, there was further time as a matter of construction of those agreements to repay the loan facilities granted under the terms sheet.  The Mason conditions are found at page 625, starting at line 30.  They say:

We advise that the Bank has agreed to honour its commitment to the company by further release of funds on the company’s Fully Drawn Loan No. 1 for development…..Such decision carries with it certain conditions which will apply in respect of the Groups’ overall borrowings, for which the Bank will require prior formal acceptance ‑ ‑ ‑

GUMMOW J:   Do you say there was not a forbearance of any description?

MR JUCOVIC:   There was not a forbearance of any description for these reasons.  In terms of the agreement, there was no forbearance.  There was not one in fact because there was an uncommunicated intention to perhaps, if these conditions were not fulfilled, call up the loan.  It was a hypothetical forbearance so far as these parties were concerned.  The parties were called in, told that this was the basis on which they intended to honour their commitment.  There was no threat, as I understand the findings, to call up

the loans, although they were technically repayable – some of them were repayable on demand.  There was no finding, your Honours, about what time a reasonable demand would mean.

So, in effect, in the same way as we would say in relation to the earlier point, there is a hypothesis being posed upon which the conduct of the respondent is judged, in the same way here there is a hypothesis in these findings, an uncommunicated intention as to forbearance, which infects the entirety of the way in which the Full Court approached the matter of the setting aside of these conditions which leads, in relation to the particular respondents, to a different result so far as their rights as sureties in relation to the observance of the terms and conditions of the contract, your Honours.  The consideration point, in a sense, raises the question of what is sufficient forbearance, in fact, upon an uncommunicated desire.

GUMMOW J:   Which cause of action, if that is the right word, does all this go to?

MR JUCOVIC:   Your Honour, it goes to the discharge.   To get to the point that the sureties were discharged, one has to get to the point of saying that the Mason conditions were not effective and there was a breach by the respondent of the terms and conditions upon which the sureties contract arose, because if there is no consideration, then the Mason conditions are irrelevant to that, your Honour.  Your Honour, those are respective submissions.

GLEESON CJ:   Thank you.  We do not need to hear you, Mr Foster.

The Court is of the view that no sufficient reason has been shown to doubt the correctness of the decision of the Full Court and the application is refused.

Can you resist an order for costs?

The applicants must pay the respondent’s costs of the application.

AT 2.12 PM THE MATTER WAS CONCLUDED