Parras Holdings Pty Ltd v Commonwealth Bank of Australia
[1997] FCA 1107
•24 OCTOBER 1997
FEDERAL COURT OF AUSTRALIA
CONTRACT - Banker and customer - whether breach by bad faith - whether breach by repudiation - whether breach by manner of valuation - implication of terms - whether lack of consideration - whether economic duress - manner in which funds released to customer.
EQUITY - Unconscionable conduct - whether position of special disadvantage - whether unconscionable advantage taken of such position - whether breach of duty to disclose - whether fiduciary relationship.
MISREPRESENTATION - Whether common law misrepresentation - whether breach of s51A of the Trade Practices Act - whether promissory estoppel.
NEGLIGENCE - Whether breach of duty of bank to exercise reasonable care and skill.
Contracts Review Act 1980 (NSW)
Trade Practices Act 1974 (Cth) ss51A, 51AA, 51AB, 82.Barton v Armstrong [1976] AC 104, refd
Blomley v Ryan (1956) 99 CLR 362, refd
Browne v Dunn (1893) 6 R 67, refd
Butt v M’Donald (1896) 7 QLJ 68, refd
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, appl
Commonwealth v Verwayen (1990) 170 CLR 394, appl
Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, appl
Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152, appl
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, refd
Fitzgerald v FJ Leonhardt Pty Ltd (1997) 71 ALJR 653, refd
Harrison v National Bank of Australasia (1928) 23 Tas LR 1, refd
Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298
Jones v Dunkel (1959) 101 CLR 298, not foll
Legione v Hateley (1983) 152 CLR 406, refd
Lloyd’s Bank Ltd v Bundy [1975] 1 QB 326, refd
National Australia Bank Ltd v Nobile (1988) 100 ALR 227, appl
National Westminster Bank PLC v Morgan [1985] AC 686, refd
O’Rorke v Bolingbroke [1877] 2 App Cas 814, refd
Pao On v Lau Yiu Long [1980] AC 614, refd
Shiloh Spinners Ltd v Harding [1973] AC 691, refd
Universe Tankships of Monrovia v International Transport Workers Federation [1983] 1 AC 366, refd
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, applPARRAS HOLDINGS PTY LTD & ORS v COMMONWEALTH BANK OF AUSTRALIA
NG 478 of 1992DAVIES J
SYDNEY
24 OCTOBER 1997GENERAL DISTRIBUTION
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 478 of 1992
GENERAL DIVISION )
BETWEEN:PARRAS HOLDINGS PTY LIMITED
(A.C.N. 003 546 807)
First Applicant/First Cross-Respondent
FULANGA PTY LIMITED
(A.C.N. 001 796 354)Second Applicant/Second Cross-Respondent
PHONTOS INVESTMENTS PTY LIMITED
(A.C.N. 000 870 762)Third Applicant/Third Cross-Respondent
ILANZ PTY LIMITED
(A.C.N. 001 885 392)Fourth Applicant/Fourth Cross-Respondent
P & E PHONTOS PTY LIMITED
(A.C.N. 000 870 771)Fifth Applicant/Fifth Cross-Respondent
DOVIZO PTY LIMITED
(A.C.N. 003 932 269)Sixth Applicant/Sixth Cross-Respondent
PETER PHONTOS
Seventh Applicant/Seventh Cross-Respondent
ELLI PHONTOS
Eighth Applicant/Eighth Cross-Respondent
HARRY PHILLIP COSTAS
Ninth Applicant/Ninth Cross-Respondent
MARY COSTAS
Tenth Applicant/Tenth Cross-Respondent
MICHAEL PHONTOS
Eleventh Applicant/Eleventh Cross-Respondent
SIBARD PTY LIMITED
(A.C.N. 003 575 291)Twelfth Applicant
SHIMCOST PTY LIMITED
(A.C.N. 003 355 048)Thirteenth Applicant
SPOTEK PTY LIMITED
(A.C.N. 050 325 212)Fourteenth Applicant/Twelfth Cross-Respondent
AND:COMMONWEALTH BANK OF AUSTRALIA
(A.C.N. 123 123 124)
Respondent/Cross-Claimant
Coram: Davies J
Date: 24 October 1997
Place: SydneyMINUTES OF ORDER
THE COURT ORDERS THAT:
Counsel should bring in short minutes of the orders for which they move.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
INDEX
PARRAS HOLDINGS PTY LIMITED & ORS
v. COMMONWEALTH BANK OF AUSTRALIAINTRODUCTION 3
PRINCIPAL EVENTS 5
THE CLAIMS 45
(i) The Applicants' Case 45
(ii) The Bank's Case 47
WITNESSES 49
(i) Generally 49
(ii) Michael Phontos 49
(iii) Peter Phontos 54
(iv) Harry Costas 55
(v) I.M. Stevens 55
(vi) A.W. Ronan 56
(vii) P.J. Gardiner 56
(viii) Norman Marshall 57
(ix) J.G. Mason 57
(x) Elli Phontos and Mary Costas 57
(xi) Jones v. Dunkel 58
BREACH OF CONTRACT 59
(i) The Terms Sheet 59
(ii) Breach by Bad Faith 64
(iii) Breach by Repudiation 66
(iv) Dishonour of Cheques 69
(v) Charges debited to Parras Overdraft 69
(vi) ANZ Settlement 70
(vii) Valuation 70
(viii) Architects' or Quantity Surveyors' Certificates 77
(ix) The Off-the-Record Conference 82
(x) Implied Terms 91
(xi) PEP bank bills 93
(xii) Sale of Unit 8 94
(xiii) Financing of Other Projects 95
(xiv) PEP Overdraft 96
LACK OF CONSIDERATION 96
UNCONSCIONABLE CONDUCT 97
(i) Principles 97
(ii) Position of Disadvantage 99
(iii) Overall Position 100
(iv) Transfer of Control 105
(v) Failure to Disclose 106
(vi) The Imposition of Stricter Controls 108
(vii) The $3 Million Amendment 110
(viii) Meeting of 5 December 1989 112
(ix) Failure to Increase the Facility as required 115
(x) The Bank's Legal Advice 116
(xi) PVD's Valuations 117
(xii) Settlement with the Housing Commission 118
(xiii) Linsley Street Development 119
(xiv) The $111,000 Dispute 121
(xv) Guarantee of Michael Phontos 124
(xvi) Funding 126
ECONOMIC DURESS 127
OTHER DEVELOPMENTS 129(i) Ashburn Place 129
(ii) Other Developments 138
FUNDING 138
(i) General 138
(ii) The Experts' Agreement 139
(iii) Progress Claim No. 1 140
(iv) Progress Claim No. 2 142
(v) Brick Shortage 143
(vi) 17 August 1990 - 31 October 1990 143
(vii) Christmas Shut-Down 146
(viii) 26 April 1991 - 4 July 1991 146
(ix) 5 July 1991 - 14 October 1991 147
(x) Wet Weather 148
(xi) Program Slippage 148
(xii) Delay due to the manner in which the funds were released 148
MISREPRESENTATION, TRADE PRACTICES ACT, ESTOPPEL 152
BREACH OF FIDUCIARY RELATIONSHIP 156
NEGLIGENCE 159
DEFENCES 161
ORDER 161IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 478 of 1992
GENERAL DIVISION )
BETWEEN:PARRAS HOLDINGS PTY LIMITED
(A.C.N. 003 546 807)
First Applicant/First Cross-Respondent
FULANGA PTY LIMITED
(A.C.N. 001 796 354)Second Applicant/Second Cross-Respondent
PHONTOS INVESTMENTS PTY LIMITED
(A.C.N. 000 870 762)Third Applicant/Third Cross-Respondent
ILANZ PTY LIMITED
(A.C.N. 001 885 392)Fourth Applicant/Fourth Cross-Respondent
P & E PHONTOS PTY LIMITED
(A.C.N. 000 870 771)Fifth Applicant/Fifth Cross-Respondent
DOVIZO PTY LIMITED
(A.C.N. 003 932 269)Sixth Applicant/Sixth Cross-Respondent
PETER PHONTOS
Seventh Applicant/Seventh Cross-Respondent
ELLI PHONTOS
Eighth Applicant/Eighth Cross-Respondent
HARRY PHILLIP COSTAS
Ninth Applicant/Ninth Cross-Respondent
MARY COSTAS
Tenth Applicant/Tenth Cross-Respondent
MICHAEL PHONTOS
Eleventh Applicant/Eleventh Cross-Respondent
SIBARD PTY LIMITED
(A.C.N. 003 575 291)Twelfth Applicant
SHIMCOST PTY LIMITED
(A.C.N. 003 355 048)Thirteenth Applicant
SPOTEK PTY LIMITED
(A.C.N. 050 325 212)Fourteenth Applicant/Twelfth Cross-Respondent
AND:COMMONWEALTH BANK OF AUSTRALIA
(A.C.N. 123 123 124)
Respondent/Cross-Claimant
Coram: Davies J.
Date: 24 October 1997
Place: SydneyREASONS FOR JUDGMENT
INTRODUCTION
This application is brought by Mr Peter Phontos and his wife Elli Phontos, their son Michael Phontos, their daughter Mary Costas and her husband Harry Costas, and also by nine companies in which various members of the Phontos family are the shareholders. Of these companies, the most significant for present purposes are Parras Holdings Pty Ltd (“Parras”) and P. & E. Phontos Pty Ltd (“PEP”). Peter and Elli Phontos were the directors of both of these companies. The shareholders were members of the family or their companies. The respondent to the proceedings is the Commonwealth Bank of Australia (“the Bank”).
The issues in dispute arose out of an agreement made on or about 5 September 1988 whereby the Bank agreed to advance $4,782,700 to enable the purchase by Parras of a property at 13-15 Wharf Road, Gladesville, to construct thereon residential units, to pay out loans to PEP and others made by the Australia & New Zealand Banking Group Limited (“the ANZ”) and also to pay out another loan due to an individual.
The applicants claim, inter alia, breach of contract, dishonour of bills and cheques, misrepresentation and misleading and deceptive conduct, negligence, breach of fiduciary duty, unconscionable conduct and estoppel. Of all these bases of claim, the most important is that of unconscionable conduct. The claim of unconscionable conduct pervades most of the individual allegations which are made against the Bank. One matter relied upon as an element of the claimed unconscionable conduct is the alleged breach of contract by the Bank.
In order to divide these reasons into intelligible sections, I shall first outline the principal facts. Then I shall outline the view of the facts the applicants propose, and thereafter the Bank's version of events, laying emphasis upon the matters which influenced the Bank in its actions. I shall then discuss the witnesses. Finally, I shall then deal in more detail with particular aspects of the transactions and with particular claims.
I do not propose to discuss every allegation made in the statement of claim, which is 171 pages in length. There are too many individual matters raised to justify my dealing with each of them. The dispute between the parties revolves around some general points of principle. I shall deal with the substance of these under one section or another. I do not intend to repeat matters at length under every possible heading which may encompass them. When dealing with matters of fact, I have kept all the allegations in mind, although I have not necessarily mentioned them. Thus, although I have discussed the issue of "bad faith" under the heading "Breach of Contract", I have kept in mind that allegations of bad faith were made relevantly under other heads such as "Unconscionable Conduct" and "Misrepresentation, Trade Practices Act, Estoppel". It is not practicable to discuss the allegations under all the heads to which they may be relevant.
I should not let the matter pass without commenting that, in my opinion, the statement of claim is far too long to promote the interests of efficient commercial litigation. There are numerous individual claims, some of which were either not mentioned by counsel for the applicants in the opening and closing addresses or were only briefly touched upon. Yet counsel declined to abandon matters set out in the statement of claim save for some few areas which were specifically mentioned. Many matters raised in the statement of claim should, in my opinion, never have been claimed and do not warrant a comment.
The question of damages has been set aside for subsequent determination. The evidence intended to be adduced on the question of damages would specify in some detail what effect the downturn in consumer demand and in prices had upon Parras’ Wharf Road development. That evidence has not yet been adduced. For present purposes, it is not in dispute that the boom in Sydney prices which occurred during the second half of the 1980s began to dissipate in the second half of 1988. During late 1988 and 1989, interest rates rose and consumer interest in residential units tended to fall. By early 1990, Australia had entered a recession and that recession continued through 1991 into 1992. This economic background undoubtedly influenced the outlook of the persons with whom we are concerned, particularly the officers of the Bank.
PRINCIPAL EVENTS
For 30 years prior to undertaking the Wharf Road project, Peter and Elli Phontos had been active in unit development, specialising in three storey home unit or townhouse projects, predominantly in the area of Gladesville and Sydney’s lower north shore. After carrying on business in partnership for many years, Peter and Elli Phontos incorporated PEP in February 1971 and, thereafter, this company functioned as their building company. A practice developed of incorporating a company to undertake each new development and for that company to engage PEP as the builder.
By 1988, Peter Phontos was getting on in age. Michael Phontos, his son, who carried on practice as a solicitor on his own behalf and who also had an economics degree, took an active interest in the projects, their financing and their legal ramifications. Harry Costas, his son-in-law, was active in the building works. I am satisfied that the business activities of Parras, of PEP and of most companies in the group were managed by these three persons.
Over the years, the Phontos family had prospered However, in early 1988, a dispute arose under a contract which PEP had for the building of a number of units for the Housing Commission at North Ryde. This contract was terminated by the Housing Commission, leaving other contracts on foot. PEP claimed over $10m from the Housing Commission whilst the Housing Commission claimed damages from PEP.
Pending the resolution of this dispute, PEP was left with outstanding liabilities, including a liability to the Taxation Department of approximately $170,000 for unpaid group tax. The Phontos family considered it desirable to undertake new projects to generate profit.
Peter Phontos gave evidence that, over the years, he had adopted the practice of purchasing the next development site as the construction of the then current development was nearing completion. According to his evidence, his practice was to obtain bridging loan funds of between 80-85% of the purchase price of the land and, after obtaining development approval and building approval, to seek a term loan for the funding of the entire development. Peter Phontos said that, upon receipt of the finance approval, he had in the past been able to draw down funds once he had carried out and completed works to the value of 20% of the cost of the total development or had provided security for that amount. Thereafter, the financier provided the funds necessary until the construction was completed. Peter Phontos said that he had only ever refinanced developments when they were near to completion and when he was able to establish the gross realisation of the current development in the market place at that time.
In January 1988, Michael Phontos moved his practice to premises in Linsley Street, Gladesville. On 15 January, he opened an account for his firm, Phontos & Co, and another account for PEP with the Bank's Gladesville Branch. His fiancee's father, Mr K.T. Robinson, was one of three Chief Managers of the Bank, ranking immediately below the General Manager.
On 11 March 1988, Michael Phontos applied for an overdraft limit of $15,000 for the Phontos & Co account. The facility was approved on 14 March.
By April 1988, one of the applicant companies, Fulanga Pty Ltd ("Fulanga"), was encountering difficulties with the ANZ, which was then the banker to the group, with respect to a development at Bannerman Street, Cremorne. The relationship was said to be "stressed". On 7 April 1988, Horwath & Horwath, chartered accountants, who had been called in by the ANZ, reported to the ANZ on the Cremorne development.
On 21 June 1988, an amount of $220,000, which had come to PEP from the Housing Commission, was placed on term deposit with the Gladesville branch of the Bank and an overdraft in the amount of $220,000 was granted, secured by the term deposit. At the time, approximately $2m was owing to the ANZ. Presumably, the new account was opened to avoid restrictions which the ANZ had placed on PEP’s account. The making of the term deposit and the opening of the overdraft is illustrative of the Phontos' preference for maintaining assets in their own hands whilst drawing on a bank's funds for the payment of development expenses.
In June 1988, Peter and Michael Phontos sought other properties for development and inspected, inter alia, a development site at Wood Street, Manly, a site at Georges Crescent, Drummoyne and a development site in Wharf Road, Gladesville. On 25 June, Peter and Michael Phontos attended an auction of the Georges Crescent, Drummoyne site, together with Mr Robinson, the father of Michael Phontos’ fiance. Peter Phontos was unsuccessful in his bid. Negotiations commenced with respect to the Manly site.
On 29 June 1988, a holding deposit of $1,000 was placed on the Manly property. Subsequently, one of the Phontos companies, Reillo Pty Ltd ("Reillo"), entered into a contract to acquire the property for $860,000. Later, an agreement was made with the Delfin Property Group, for that organisation to take over the development. A part of the arrangement was that another Phontos company, Ilanz Pty Ltd ("Ilanz"), would receive a "spotter's fee" of $100,000, that PEP would construct the Manly units and that a certain proportion of profits, once they had arrived at a specified level, would be paid to the Phontos group.
In early July, Michael Phontos discussed with Mr Robinson the proposed acquisition of the Wharf Road site. Mr Robinson suggested that a new company should be formed. According to Michael Phontos, Mr Robinson suggested that that company should seek acquisition and development funds from the Bank. A 10% deposit was paid on the Wharf Road site on 10 July 1988, the purchase price being $945,000. Parras was then established for the purpose of the acquisition and development.
On 15 August 1988, in a letter prepared by Michael Phontos, PEP wrote to Mr N. Marshall, who was an officer of the Corporate Lending Services Division of the Bank ("CLS") under Mr Robinson, setting out some details of the Phontos group and of the proposed development.
Shortly thereafter, Michael Phontos delivered to the Bank a cashflow document which set out expected income and expenditure with relation to the Cremorne project, which was then completed or close to completion, the Manly project, which was in its infancy, the Wharf Road project and projects under the remaining Housing Commission contracts at Meadowbank, Redfern and Harbord.
On 30 August 1988, Mr Marshall, in a memorandum, outlined a finance proposal which he recommended. This was approved by Mr Robinson on 31 August. Although Mr Robinson was not part of CLS, he had the relevant authority. On the same day, Mr Marshall wrote to Mr Phontos setting out an offer, the terms of which were set out in a document called the "terms sheet". The terms sheet was executed by Parras, PEP, three other of the companies in the group and by Peter and Elli Phontos and Harry and Mary Costas and was returned to the Bank by letter of 5 September 1988.
I shall later set out more details of the facility. For the moment, it is sufficient to describe the principal elements. The borrower was to be Parras. There was to be a progressive fully drawn loan of $2,600,000 (FDL 1), a fully drawn loan of $2m (FDL 2) and a bank guarantee of $182,700. FDL 2 was intended to take over the existing facility with the ANZ, of which PEP and Fulanga were the principal debtors.
The terms sheet proposed a period of 12 months the development, 9 months for the construction and 3 months for sales. The FDL 1 was to be paid off upon the completion of the development within 12 months. During that period, interest on FDL 1 was to be capitalised. No period was stated with respect to FDL 2 but the terms sheet provided for progressive reduction of this facility from the profits from the sale of the units in the Cremorne development, from profits from the Wharf Road development and from the proceeds of the claim against the Housing Commission. Other terms provided that the Bank's valuation of the security properties was to achieve an "on completion" figure of at least $6.4m, that funds were to be released against architects' or quantity surveyors' certificates and that proceeds of up to $1m if forthcoming from the Housing Commission claim were to be directed to the reduction of the Parras facilities.
Settlement for the Wharf Road site was required before the valuations had been carried out. On 9 September 1988, after a discussion between Michael Phontos and Mr Marshall, the Bank agreed to release sufficient funds to complete the acquisition of the Wharf Road property, notwithstanding that the plans and specifications, costing and development approval pertaining to the property would not be available. Mr Marshall advised that, following acquisition, further funds were not to be released until all the conditions of the facility had been met.
Michael Phontos has given evidence that, about 8 September 1988, he had a telephone conversation with Mr Marshall in which Mr Marshall said that the applicants were not to worry about the valuations, that the Bank would rest upon its own armchair valuations. Mr Phontos asked whether they stacked up to at least $6.4m and Mr Marshall said "yes". I think a conversation of this nature did not occur. It would be quite inconsistent with a letter sent by Mr Marshall to Mr Phontos of 7 September and a memorandum to the Gladesville Branch from Mr Marshall of 9 September 1988.
All required mortgages and guarantees were executed on 15 September 1988 and the Wharf Road property was acquired on 16 September 1988. As the Bank funded the full price of the purchase, a deposit of $90,000 came back to Parras. This was placed on term deposit and an overdraft of $90,000 was granted to Parras. When the arrangements were made with respect to the $90,000, Michael Phontos informed Mr Marshall that the $90,000 would be used for working capital to fund the payment of preliminary costs of the Wharf Road development. It appears that, in fact, only a small part thereof, $5,000 for architects' fees, was actually used for that purpose.
On or about 21 September 1988, the Bank received from its Property Valuation Department ("PVD") valuations of the security properties. At that stage, the Wharf Road property was valued just by reference to the site. On 21 September 1988, PEP received advice from its architects that the construction costs would amount to $1.5m.
In about September 1988, the Housing Commission cancelled the three remaining construction contracts at Meadowbank, Redfern and Harbord. This, of course, placed additional financial pressure upon PEP for it no longer had ongoing receipts from the work it had been carrying out for the Housing Commission.
On 29 September 1988, the application for development approval for the Wharf Road development was lodged with the Ryde Municipal Council.
On 4 October 1988, Michael Phontos contacted Mr Marshall and advised that the payout figure to ANZ was $2.15m, rather than the original estimate of $2m. He said that the cost of the Wharf Road project had been downsized from $1,410,000 to $1,300,000. He suggested increasing FDL 2 to $2.15m and decreasing FDL 1 to $2.5m. Mr Marshall reported that the nominal increase in facilities involved was viewed as safe. The change was approved and put into effect.
At about the same time, a temporary advance of $800,000 was sought to enable Reillo to acquire the Manly property. On 12 October, the Bank increased the overdraft accommodation by $850,000 as follows:-
"Overdraft Limit $ 90000.00
Fully Drawn Loan No. 1 $2500000.00
Fully Drawn Loan No. 2 $2150000.00Fully Drawn Loan No. 3 $ 182700.00
Contingent Liability Limit $ 800000.00
Total Facilities $5722700.00"
The $800,000 related to funds which the Bank advanced to assist the purchase of the Manly property. This sum was repaid shortly thereafter and we are not concerned with it. FDL 1 was reduced to $2,500,000. FDL 2 was increased to $2,150,000 to permit the payout of the ANZ.
On about 6 October 1988, the Gladesville Branch was asked to contact Michael Phontos to obtain access to the plans and costings respecting the Wharf Road property so that a valuation on an "on completion" basis could be done. These were received shortly thereafter and forwarded to PVD on 12 October 1988. The development was for 12 units, four townhouses and one cottage. As it ultimately developed, the project became 15 units and the cottage. It has not been suggested that changes made in the design had any material effect on the development and its progress.
On 7 October 1988, ANZ advised that payment under its guarantee of $182,700 had been demanded.
On 19 October 1988, the Bank received from PVD a value of the Wharf Road development on an "on completion" basis. PVD put a value of $175,000 on each of the units rather than the $200,000 which Michael Phontos had estimated. After legal and selling expenses, the net was calculated as $2,793,400. PVD then went on to make further deductions of the type made in an "in one line" basis of valuation, which I shall later discuss, and valued the project at $2m.
The result of the valuations was that the Bank was well short of the $6.4m security specified in its terms sheet of 31 August 1988, whether the $2m or the $2.79m figure was adopted. On 2 November 1988, Mr Marshall signed an internal memorandum which reviewed the risks and concluded that the position was unacceptable.
Mr Marshall recommended that additional freehold security be sought. Mr Robinson approved the recommendation. Because of the Bank's practice of keeping its valuations confidential to itself, presumably to protect its valuers, Peter and Michael Phontos were not then advised of the value which the Bank placed upon the Wharf Road development. However, Michael Phontos was informed that further security was required.
After discussion, Michael Phontos agreed to grant a second mortgage over a property owned by him at 23 Ashburn Place, Gladesville. He said that no other security was available. The security, when executed, was expressed to be for advances to Parras and to himself.
Settlement with the ANZ was originally scheduled for October 1988. However, it did not take place while the Bank considered its position. During this period, Mr Marshall considered the matter and, with the approval of Mr Robinson, sought further security. After Michael Phontos undertook to give a second mortgage over his property at 23 Ashburn Place, settlement was arranged with the ANZ and took place on 9 November 1988.
By 24 November 1988, Parras was overdrawn on its limit of $90,000 although, as I have said, very little of that money had been spent on the Wharf Road development. The account was overdrawn in part because various stamp duty and other charges and bank fees had been debited to the account. To overcome the problem of the overdrawn account, Michael Phontos decided to work on the cheque account at the Bank in the name of PEP and this was done.
In late November 1988, a problem arose because a company had obtained a default judgment against PEP. PEP was required to put up a cash bond or bank guarantee of $80,000 as security for the payment. On 30 November 1988, Mr Marshall reviewed the position of the group and recommended the issue of a bank guarantee of $80,000 and that a review of the group be undertaken in late January 1989. Mr Robinson approved the recommendation. About that time demolition and clearing work commenced on the Wharf Road property.
By late 1988, there was concern in the Bank at PEP's growing overdraft. In December, Mr Ronan noted that he had contacted Peter Phontos and discussed the debt which was then $432,599 and had been informed that the problem had resulted from a delayed progress payment and that no further cheques were to be issued. Mr Marshall noted that the matter was to be discussed with Michael Phontos on his return from overseas. Michael Phontos married on 10 December and was overseas for some weeks.
On 7 December 1988, the Bank advised that PEP's approved overdraft had been increased to $370,000 secured by the two term deposits totalling $320,000 plus interest on those deposits of approximately $50,000. On the same day, Michael Phontos, who was also overdrawn, was granted an increase in his overdraft limit of $15,000 to $50,000 "for working capital requirements." Shortly thereafter, the appropriate guarantees and acknowledgments of the total liability were executed. The limits were never respected. The PEP overdraft continued to grow. It had reached $1,023,955 by 18 August 1989. The officers of the Gladesville branch, Mr Ronan and Mr Stevens, did not consider the limit of the drawings to be within their control. The account was under the control of CLS. Mr Robinson, of course, would have been aware of the dispute with the Housing Commission and of the hopes which Peter and Michael Phontos had of achieving substantial success therein.
Development approval for the Wharf Road project was granted by the Ryde Municipal Council on 14 December 1988.
In early 1989, Mr Marshall was transferred and his place was taken by Mr R.J. Allen-Ankins.
In January 1989, the Bank was reorganised. A new office entitled the Northern Metropolitan Zone ("NMZ") was established. Subsequently, most of the substantial corporate accounts at Gladesville were placed under the control of this zone. However, two clients, including the Phontos group, remained under the control of CLS.
By 17 February 1989, Mr Stevens noted that the excesses on PEP's account should peak at $601,000. He noted that Michael Phontos was to prepare a full cash flow with all expected expenditure.
On 28 February 1989, after reviewing the file, Mr Allen-Ankins of CLS wrote to Gladesville stating that a review of the group was now due and that a detailed report was awaited. Mr Stevens was unexpectedly absent from the branch for some time with the result that the review was not immediately undertaken.
On 9 March 1989, Michael Phontos forwarded to the Bank the building approval plans, the specification and the bill of quantities. The bill of quantities estimated the cost of construction at $1,419,023. This was said to include builders' profit at 12.5%.
On 5 April 1989, the Chief Manager of the PVD, advised the Bank that PVD costed the project at $1,964,535, excluding preliminary expenses.
When Mr Stevens returned to the Branch in early April 1989, he asked Michael Phontos for a cash flow, which was promised for 12 April 1989. The cash flow when received showed anticipated outgoings and anticipated receipts with respect to four projects. One was the Manly project, Delfin’s project, which PEP was building. The second was the Wharf Road project, which was shown as receiving construction income as from May 1989, which was improbable as building approval had still not been received. The third was a proposed development by Michael Phontos in Ashburn place which did not proceed. The fourth was a proposed project in Victoria Road, Drummoyne which also did not proceed. The cash flow also included a receipt of $365,000 in May 1989 from the sale of one of the units in Cremorne, which did not occur. The cash flow showed a payment of $15,000 each month for 11 months commencing May 1989 to the Taxation Department, in respect of the outstanding group tax.
The information provided by Michael Phontos would not have appeared to be particularly reliable. The PVD had placed a lower value and a higher cost on the development than had Michael Phontos. Of the cash flow projections, the only project actually proceeding was that with respect to Wood Street, Manly. Two of the projects listed had not been the subject of any formal application for finance. The PEP account was seriously overdrawn, just under $800,000. There were expenses such as the group tax and costs in relation to the Housing Commission arbitration to be met.
On 19 April 1989, it was noted that accounts of the group were substantially overdrawn and that it was estimated that the PEP accounts would peak at $850,000. By this time, Mr Ronan considered that, "Our client's ultimate success will depend heavily on the outcome of the case against the Housing Commission" and considered that the likely success of that case should be investigated before funding on FDL 1 proceeded. On 5 May 1989, Mr Allen-Ankins noted that excesses were becoming a feature of the Phontos account and he recommended that urgent action be taken. Mr Robinson noted on that memorandum that “Security, if any, should be sought from Michael Phontos.” Mr Allen-Ankins noted “We need to have detailed discussions with the clients and manager to get a handle on where these accounts are going.”
On 9 May 1989, Mr Allen-Ankins informed the Gladesville Branch that the conduct of the accounts was to be fully reviewed and said:-
"The conduct of these accounts is to be fully reviewed, however before setting up an interview with the clients we have requested PVD to urgently revalue the Wharf Street property.
In the meantime would you please exercise firm control on the current level of excesses, ensuring our overall exposure does not increase. Excesses on Phontos and Co are not to be increased without additional security."
On 16 May 1989, Michael Phontos notified the Bank that a cheque for $63,500 had been drawn on the PEP overdraft for the purchase of a property at Darling Street, Balmain. It was proposed that there would be a joint venture between Ilanz and Delfin with respect to that property. PEP was to construct the developments for $1.3m. On the same day, Mr Robinson authorised payment of the cheque.
About 17 May, the Chief Manager of PVD, Mr Fernie, advised Mr Robinson that a Gladesville agent had expressed the view that the expected price of the Wharf Road units would be up to $200,000 per unit and that another agent had indicated a price range of $190,000 to $200,000. Mr Robinson noted that, on the basis of $200,000 per unit, Mr Fernie had said that the sales, including the home on the property, could achieve $3,300,000. Mr Allen-Ankins noted in an internal memorandum of 18 May 1989:-
“PVD have confirmed `On Completion’ valuation and investigations by Mr Fernie have established a total sale price of $3.3M.
...
The company is on an expansion programme without the necessary working capital to continue operations and we will be better equipped to judge this after the interview tomorrow.”
On 18 May 1989, there was a meeting between Peter, Elli and Michael Phontos and Mr Allen-Ankins and Mr Ronan at which the position was discussed. Mr Allen-Ankins noted in a memorandum of 9 June 1989:-
"We explained that the conduct of their accounts was far from satisfactory and that since inception facilities had not been respected. We then went through the matters raised in our memorandum 5 May and put it to them that without further capital injection they would be unable to continue operations. We also expressed concern that they would contemplate a further joint venture with Delfin given their circumstances.
They expressed complete surprise at our claim ..."
On 23 May 1989, Michael Phontos forwarded a revised cash flow document. In addition to dealing with the Manly and Wharf Road projects, the cash flow document dealt with projects at Balmain, Ashburn Place and Drummoyne, none of which went ahead.
On 30 May 1989, Michael Phontos sent to Mr Stevens a list of "creditors outstanding". This showed quite a number of creditors, many of whom were being paid by instalments. Some of the debts went back to late 1987. One of the debts amounted to $250,000.
On 1 June 1989, the Ryde Council issued building approval for the Wharf Road development. Substantial work on the construction did not commence until after August 1989. However, during the second half of 1988, plans had been prepared and there were negotiations with the Council. During the first half of 1989, preliminary work by way of demolition and clearing of the site, leaving only the cottage which was to be retained, was undertaken. On 1 June 1989, PEP executed a building contract with Parras for the construction of works for $1,419,000.
Michael Phontos has given evidence of a long conversation between Mr Ronan and himself on about 5 or 6 June 1989. I need not discuss this other than to say that I prefer Mr Ronan's evidence.
On 6 June 1989, Mr Ronan wrote to CLS reviewing the overall situation. PEP's overdraft at that time stood at $1,123,096. The Phontos & Co account was at $112,858. Mr Ronan recommended that the terms sheet should be amended to require payment of up to $3m from the proceeds of the Housing Commission arbitration.
Mr Allen-Ankins noted in a memorandum of 9 June 1989 that, at the meeting with Peter, Elli and Michael Phontos on 18 May 1989, the Phontos group had expressed the view that their accounts had peaked and that the position would start to improve. Mr Allen-Ankins said that Mr Ronan had proposed providing additional support to complete Wharf Road and to finance Ashburn Place, a project of Michael Phontos, on the strength of an anticipated favourable outcome of the Housing Commission case. He noted that a shortfall to complete the project was inevitable. Mr Allen-Ankins went on to express the view that:-
“These funds [the profits shown in the cash flow] will not clear excesses and sale of units will not clear FDL 2 and 3 $2.47m.
The group is virtually bankrupt and given the downturn in the real estate market and building industry in general the ability of the group to trade out of their predicament is not evident.
...
There is no good news for the group in the short term and at some stage CBA will have to bail out. It is therefore recommended that CBA take steps now to call up its debts in lieu of the branch proposal.”
Mr Robinson noted on this memorandum that relevant documents should be forwarded to the Legal Department for an efficacy check and that steps should be taken to maximise available security. Mr Robinson approved the suggestion which Mr Ronan made that the conditions of the loan be amended to require moneys up to $3m which may be coming from the Housing Commission to be directed to the reduction of the Parras facilities.
On 15 June 1989, Mr Allen-Ankins wrote to the Gladesville Branch to say that the account was to be strictly controlled and that debts were not to increase beyond their current levels. He also gave instructions for the implementation of the matters specified by Mr Robinson.
On 19 June 1989, Mr Stevens informed Michael Phontos that the level of debts on the group accounts was not to increase beyond their current level. Michael Phontos said that work on Wharf Road would have to cease due to this ruling. Mr Stevens' diary note of this conversation reads, inter alia:-
"I interviewed Michael Phontos today to bring to his notice the requirements from our P/O/C that the level of debts on the group accounts are not to increase beyond their current level. It was stressed to Mr Phontos that this applied to all accounts including the P & E Phontos accounts and the Phontos & Co account.
The implications of this directive from town were discussed with Mr Phontos and it rapidly became evident that work on Wharf Road would have to cease due to this ruling. To overcome this, Mr Phontos requested that we allow the release of an additional $80,000 on the P & E Phontos accounts to enable the uplifting of the BA plans from Ryde Council at a cost of approximately $39,000 plus allow work to the value of $41,000 to proceed.
His request was relayed to Mr Allen-Ankins and it was approved subject to these excesses being cleared by the release of funds after a progress payment inspection."
Michael Phontos was informed that the release of $80,000 was approved subject to the excesses being cleared by way of the release of funds after progress payment inspection and on the additional condition that the $1m to come from the Housing Commission be increased to $3m.
On 22 June, 1989, progress claim No. 1 was lodged. The claim had been prepared by Michael Phontos and was not accompanied by an architect's or quantity surveyor's certificate. Thereafter, all progress claims were calculated and lodged by Michael Phontos or Harry Costas. The claim sought $155,572 which included charges of $45,000 and professional fees of $61,500. There was a dispute as to whether those items were allowed. On 3 July 1989, an officer of the Bank reported that the value of work completed to date was $75,000 and that a progress payment could be made accordingly. The Bank paid $75,000 on 19 July 1989.
On 26 June, PEP uplifted the Building Approval and paid the fee of $38,370.
On 26 June 1989, Mr Allen-Ankins had recommended the imposition of establishment fees for the excesses both on the PEP account and those of Phontos & Co. On 30 June 1989, Mr Ronan wrote to PEP:-
"We have been further instructed today to apply an additional establishment fee of $2100 to cover the increased borrowings since early this year which has today been charged to your account No. 2171 148-551."
I do not take this as being a formal grant of an increase in the overdraft limit. I take the imposition of the establishment fee as being no more than the imposition of an additional charge for what had occurred in fact.
In the same letter, Mr Ronan wrote to PEP:-
"We refer to the discussions between Mr Michael Phontos and Mr Stevens of this office on 19 June 1989 and confirm that our Lending Administration in Sydney has instructed us to contain the debt of the company at its (then) present level.
Further excesses of $80,000 were approved on the strict understanding that funds were used for Wharf Road, Project expenditure including B/A fees Progress payments monies soon to be released will be applied wholly to these excesses. According to your account balances these funds are now fully drawn."
On 30 June 1989, Michael Phontos was informed that the balance of his account was $146,600 and that this figure was not to increase.
On 30 June, 1989, Mr Ronan noted that approved excesses had been fully utilised. On 30 June 1989, one of PEP's cheques was dishonoured. Further cheques were dishonoured in the next few days.
On 5 July 1989, Mr Ronan wrote to Parras as follows:-
"As discussed with Mr Michael Phontos on 19 June 1989 we require the following amendment to the Bank's original Term Sheet:-
`Proceeds of up to $3,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde Project) being directed to reduction of Parras Holdings Pty Ltd's facilities with the Commonwealth Bank of Australia.'"
On about 12 July 1989, Michael Phontos spoke to Mr Stevens and then to Mr Ronan. Michael Phontos alleged that some cheques had been dishonoured whereas PEP should have had moneys available to meet the cheques. Mr Stevens said that PEP had to work within the limit as at 19 June.
On 12 July 1989, Michael Phontos had opened a cheque account for PEP with the ANZ at its Gladesville branch with a view to operating if possible outside the Bank's restrictions. During July and August, Shimcost Pty Ltd ("Shimcost"), a company of Harry Costas, advanced some funds to assist the project to go ahead and PEP drew funds from its new ANZ account into which moneys from the Manly project had been paid. On 14 July 1989, Ilanz entered into a joint venture with Delfin to develop the Balmain property. PEP entered into a building contract to construct the development for $1.3m.Cheques drawn by PEP continued to be dishonoured. On about 27 July 1989, PEP received a summons from the Housing Commission which sought security for costs of $658,000 in the arbitration which was then on foot.
On 19 July 1989, Mr Stevens rang Michael Phontos to say that cheques could only be issued when further income was received.
At about the end of July 1989, Mr Ronan informed Michael Phontos that unless the members of the Phontos group executed the amendment to the terms sheet which had been sought providing for the payment of $3 m to the Bank in lieu of the $1m already agreed, then the Bank would not advance any further funds for the construction of the Wharf development. On 2 August 1989, the $3m amendment was executed and delivered to the Bank.
The Northern Metropolitan Zone ("NMZ") had been formed early in 1989. Its General Manager was Mr Perkins and the Regional Manager was Mr J.G. Mason. In about April, Mr Mason had visited the Gladesville branch in the course of his duties. He had then noticed that there were excesses on the PEP account and that no proper arrangements appeared to be in place. After discussing the matter with Mr Perkins, Mr Mason wrote to CLS bringing the situation to their attention and advising that NMZ would appear to be the appropriate body to control the account. Mr Robinson replied on 8 June 1989 to say that monitoring of the accounts would be maintained and controlled by CLS. Mr Mason spoke again to Mr Perkins who then raised the matter with Mr Johnson, the Bank's General Manager for New South Wales. On 25 July 1989, control of the Phontos accounts was transferred to NMZ.
Presumably resulting from Mr Johnson's involvement in the issue of control, Mr P.R. Hill undertook a review of the Phontos accounts. He reported on 20 July 1989 and said, inter alia:-
"From the beginning this was a potential loss connection. It had all the earmarks - another bank client transferring apparently without reason, substantial forex loses incurred while with ANZ, was already suffering cash flow problems as a result of the HC dispute and no financial statements made available. Moreover, subsequent valuations did not realise estimates and the bank's security position was most unacceptable. Since acquisition the debt position has worsened, exacerbated by the legal expenses involved in the HC dispute.
...
This is a connection which should not have been acquired. The warning signals were present from the outset. Although not clear from the file, would suspect that escalation of the debt has occurred from a combination of a lack of direction (until recently) from this administration and a lack of control by the branch, possibly attributable to a perception by the branch that CLS management was comfortable with the connection. Having said that, however, it is noted that the P & E Phontos P/L debt increased $220,000 since branch advised not to allow increase in debt levels.
Against the foregoing background it is recommended:
(1) that a provision for principal loss $50,000 be established and interest reserved;
(2)that the file be immediately transferred to control of General Manager Northern Metropolitan (NSW) Zone ..."
On that memorandum, Mr Johnson noted:-
"I have told Mr Perkins of the transfer of the control to him and apologised for the state of the account. I agree this business we should have let pass at the outset."
On 24 July 1989, a second progress claim for $113,460 was submitted to the Bank. Because of the consideration that was then being given to the file, this claim was not dealt with.
On 31 July, 1989, Mr Mason, the Regional Manager of NMZ, wrote to the Gladesville branch to say that there was to be no increase in debts permitted on any of the accounts. On 3 August 1989, there was a meeting between Peter Phontos, Michael Phontos and Harry Costas and officers of the Bank, Mr Mason, Mr B.J. Gardiner and Mr I. Stevens. Mr Gardiner had been appointed manager of the Gladesville branch in place of Mr Ronan on 1 August 1989. Mr Mason said that the Bank was worried about the construction funds, that its property department would be asked to value the project and that, until further advice was given, no more cheques were to be drawn. Mr Mason asked whether the members of the group could provide further security and was informed that they could not.
On 14 August 1989, PVD reported on the project and said, inter alia:-
"The Bank's costing figure of $1,964,555 is likely to increase in line with inflation. The project will rely heavily on the prospect of the currently depressed housing market showing sharp improvement before the completion date to enable the selling prices to cover costs of land, building and interest."
On 29 August 1989, Mr H.J. Broekhuijse, the Bank's solicitor, advised Mr Mason that the Bank was not in a strong position to cancel the commitment given in the terms sheet of 31 August 1988. Mr Broekhuijse said that a court could conclude that the Bank’s claimed right to cancel the commitment at its pleasure was inconsistent with the agreement to provide a fully-drawn loan on a progressive basis to fund the development of a particular project.
In the light of this, Mr Mason, on 30 August 1989, wrote an internal memorandum advising that the Bank had little alternative but to follow Parras through the development of the Wharf Road project. Mr Perkins, the General Manager of NMZ, commented on this memorandum that:-
“In the light of our legal advice which was also the writer’s opinion we find it extremely difficult to `walk away' from the commitment. The former administration's tacit approval to the variations of the original term sheet leaves us with little option but to push ahead on the basis proposed above.
Please undertake the discussion with all parties as indicated pointing out our concerns at the Group’s present position and the need to pursue an early settlement with the Housing Commission. Progress claims are to be strictly policed.”
A letter of 30 August 1989 was then prepared which set out conditions which have been described as "the Mason conditions". The letter was handed over and the general position discussed at a conference on 30 August 1989 which Peter and Michael Phontos and Harry Costas attended. At the conference, Mr Mason made it clear, as he recorded in a memorandum of 31 August, that the Bank's further involvement depended absolutely on all conditions being accepted and acknowledged. Mr Mason said that the Bank wanted to make sure that every penny that was advanced went into the Wharf Road project and nowhere else and that the Bank would release payment only upon invoices that came in in respect of the Wharf Road development. He said that the group would also have to pay interest as from September. Mr Mason said that no funds would be provided unless the members of the group agreed to the CBA’s requirements. Mr Mason handed over the letter dated 30 August 1989 which was addressed to Michael Phontos and which read inter alia:-
"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 of the 13-15 Wharf Road Gladesville, development project. Such decision carries with it certain terms and conditions which will apply in respect of the Group’s overall borrowings, for which the Bank will require prior formal acceptance by all of the Group’s borrowing companies, and also by yourself and all 3rd party mortgagors. Such conditions are set out hereunder:-
1.Funds which are to be provided will be for the express purpose of completing the Wharf road development project.
2.Borrowings on the Company’s No. 1 Fully Drawn Loan will be limited to a maximum of $2.5M being the level of the commitment previously given.
3.Progress payments will only be made against original invoices which are to be submitted to the Bank for approval.
4.It being clearly understood and acknowledged that any shortfall in funds which may occur in completion of the project are to be provided from the company’s own resources or by outside borrowing.
5.Proceeds of up to $3,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde project) are to be directed to a bulk reduction of Parras Holdings Pty Ltd facilities, or to any other of the Group’s borrowings as the Bank may require.
....
7.All existing Group accounts to be placed on an “In Reduction” basis with no further drawings permitted other than on the “Progressive” Fully Drawn Loan No. 1 of Parras Holdings Pty Ltd.
8.Debts on all such accounts to be contained within present levels with interest to be met as charged each quarter commencing September 1989. In this regard, cash flow projections from all building projects in hand and any other income source are to be made available to the Bank as soon as possible to demonstrate the Group’s ability to meet such interest payments.
...
10.An unlimited guarantee supported by the security referred to in (9) above to be given to the Bank by Mr Michael Phontos in favour of all the Groups borrowings.
11.Remaining units at Bannerman St Cremorne to be sold as soon as possible with proceeds applied in permanent reduction of the Parras Holdings Pty Ltd No. 2 F/D/L.
In the event that any of the above terms and conditions as set out above are not respected the Bank may need to look to resources available to it under its Securities for repayment of the borrowings.
Upon acceptance of the above conditions by all parties, the Bank will release an initial progress payment of $118,000 toward further development of the Wharf Road Gladesville project.”
The members of the Phontos family were reluctant to accept these conditions but finally agreed to do so. Michael Phontos, in particular, was reluctant to give the required security and guarantee supporting all of the group’s borrowings. He sought a restriction of the security to the borrowings of Parras. This was not accepted. The members of the family and the companies agreed to the Bank's terms.
In the discussion, Michael Phontos pointed out that there could be extreme difficulty in meeting the September interest on the borrowings but said that Parras would comply with meeting interest as charged from December 1989 on. Mr Mason agreed to put this before Mr Perkins as a reasonable departure from the terms which had been laid down. There was a discussion as to the $118,000 referred to in the last paragraph of the letter of 30 August 1988. Mr Mason indicated that the Bank intended to release sums up to that figure in respect of accounts outstanding to date. The matter was left on the basis that there would be further liaison with the manager of the Gladesville branch with respect to the level of funds sought for work to date. There was a discussion about the problem of invoices. It was suggested that the Bank may care to issue a guarantee to suppliers which would allow invoices to be submitted after delivery. Mr Mason said that CBA Gladesville could look further at that. Michael Phontos agreed that he would provide cash flows as soon as possible.
At the time, no party would have had reasonable grounds for concluding that the Wharf Road project could be completed within the limit of the commitment of $2.5m. Officers of the Bank doubted that it would and thus insisted on condition 4. The members of the Phontos family, if they had given their attention to the point, would not have been justified in concluding that they could complete the project within the limit. PEP had outstanding debts, its debts had increased over the prior 12 months and interest was accruing. Nor could any of the parties have concluded that point 3 could be implemented without slowing down the progress of the works.
However, those were the terms which the Bank put forward and which the Phontos group thought obliged to accept.
A concluding paragraph in Mr Mason’s memorandum of 30 August is worth noting, as it reflects the attitude taken by the Bank’s officers at that time:-
"To conclude the meeting, I reinforced the point that the Bank’s agreement to provide further support to the Wharf Rd project, and indeed, to continue to carry the Group’s existing borrowings, rests entirely upon all conditions set out in our letter being formally accepted and acknowledged by all parties (condition re meeting of interest in September 89 to be ratified). The need for close management controls, both from construction and financial point of view were stressed to all parties.”
On 6 September 1989, the applicants executed and provided to the Bank the necessary documents including the guarantee by Michael Phontos which the Bank demanded.
On 7 September 1989, there was a discussion between a Mr M.P. Havron, Assistant Manager - Branches, Mr Stevens and Harry Costas in which the invoice system was discussed. Harry Costas was advised that costings needed to be itemised so that the link with invoices could be maintained.
On 8 September 1989, PEP's two existing accounts were consolidated and the account placed in reduction. On the same day, $46,000 was released to PEP. The $46,000 was described in a memorandum from Mr Havron as "Authorised based on invoices produced". On this memorandum, Mr Mason noted in handwriting "Invoices linked to actual work completed". The work then proceeded with the development, but rather slowly as the Phontos group was short of funds.
On 15 September, the Bank undertook to Boral Steel Pty Limited to pay invoices relating to the delivery of structural steel to the Wharf Road site. Like arrangements were subsequently made with other companies.
On 18 September 1989, further costings were received from Harry Costas to facilitate matching the progress claims with invoices.
On 22 September 1989, Harry Costas supplied a bill of quantities which showed the anticipated cost of each item and the value of the work already done. This document was thereafter used by Mr Stevens when calculating the payments that were to be made and became known as the "release record". At the same time, Mr Stevens set up what has been called the "funding register" which commenced with $1,198,076 which was the balance of the loan available on 3 October 1989. These documents to be used for recording and checking payments was submitted to and approved by NMZ.
On 3 October 1989, Mr Stevens made a calculation from these figures which showed to him that FDL 1 stood at debit $1,301,925, leaving a balance of $1,198,075 available to meet draw-downs, estimated to cost $1,147,102.
On 26 September, Mr Mullins of NMZ confirmed the release of a progress payment of $19,000 but said that no further payments were to be released until the cash flow and an increase in insurance cover which had been sought were received. On 30 October, Peter Phontos and Harry Costas were informed that the release of further funds would be frozen until they produced the cash flow and the increase in insurance cover which had been requested.
A cash flow prepared by Michael Phontos was drawn up as at 5 October 1989. It showed income and expenditure with respect to the Manly project, the Wharf Road project, the Balmain project and the Ashburn project and income from sales of the two units at Cremorne. This cash flow was no more reliable than the earlier ones. If profits were being received from the Manly project, they did not seem to be reflected in PEP’s financial position. The Ashburn Place project and the Balmain project had not been commenced and did not proceed. The Cremorne units were not sold as projected.
There was a delay in the construction from 11 October to 1 November as bricks were not on site. In late October, an application was made for increased facilities in the sum of $90,000 in respect of the costs of the Housing Commission arbitration. This increase was recommended by Mr Gardiner, the Manager at Gladesville, but was rejected by his superiors. An offer by the Housing Commission to settle for $1.5m plus costs had been refused as a more realistic settlement of $3.5m to $6.5m was considered achievable.
On about 20 November 1989, the Housing Commission arbitration was settled by the payment to PEP of $3.95m. Of this sum, $3.55m was invested at the Bank's Stock Exchange branch in bank bills maturing on 22 December 1989. On 28 November 1989, when the Gladesville branch was advised of this transaction, Mr Gardiner sent a facsimile to the Stock Exchange branch of the Bank to advise that the clients had undertaken that the first $3m received under the settlement would be applied in reduction of their debts. He requested that a “stop” be placed so as to ensure that the funds were not released without the consent of the Gladesville Branch.
On or about 30 November, Mr Mason instructed the Gladesville branch to obtain an irrevocable order with respect to the $3m and advised that he would undertake an interview only if there were any problems.
On 5 December 1989, there was a meeting between Peter Phontos, Michael Phontos and Harry Costas on the one part and Mr Gardiner on the other. Mr Stevens also attended for some of the time. Mr Gardiner appears to have considered that he could assist the Phontos group by holding a meeting “off the record”. He took no notes of the meeting and felt free to offer advice as to what he might seek from the Bank by way of relaxation of the terms which had been imposed on them.
Any “off the record” talks between banker and customer are, of course, undesirable. In the present case, there is a dispute as whether Mr Gardiner made promises on behalf of the Bank. I am satisfied that he did not do so but merely indicated what were propositions which he could put forward. However, inconsistently with the context of an “off record” discussion, Mr Gardiner produced towards the end of the meeting an irrevocable authority authorising payment to the Bank of $3m out of the bank bills and he requested Peter Phontos to sign it. Mr Gardiner said that it was a matter “of honour” that Peter Phontos sign the document. Peter Phontos did so against the advice of Michael Phontos.
On 6 December 1989, Michael Phontos wrote to the Bank authorising the Bank to apply the $3m in reduction of the debts and requesting certain benefits including the release of all the term deposits, matters which had been discussed in the conference with Mr Gardiner.
On 7 December 1989, in an internal memorandum forwarding this letter to NMZ, Mr Gardiner noted that the Wharf Road project appeared to be substantially undervalued at $2m “on completion” whereas the client's estimated sales should clear at $3.5 - $4m. He recommended that the property valuers be requested to revalue. Mr Gardiner went on to say that the Phontos family were anxious to obtain the release of the term deposits totalling $485,000 to complete other jobs and possibly upgrade the finish of the Wharf Road project. He said that if the Wharf Road security was revalued higher, there would be room to accede to their request. He said that the other requests were less important and could be dealt with as NMZ saw fit.
On 19 December 1989, Mr Havron reported on the matter in an internal memorandum. He recommended that, as the Phontos group was now in a better position to complete and sell the units as individual lots within a reasonable and workable time frame, a more lenient attitude to the security was warranted. However, when the matter came before Mr Mason, he took a stricter view of the matter. In particular, Mr Mason was of the view that not all of the term deposits could be released. Mr Mason's decision was conveyed orally to Michael Phontos.
On 21 December 1989, Peter and Michael Phontos met Mr Mason, who informed them that he would not be prepared to release all the term deposits but would be prepared to reassess the overall position in the following April. In an internal memorandum dated 27 December 1989, Mr Mason recorded:-
“In all the circumstances, I am not prepared to move from our original decision and accordingly, request for release of further T/D funds is declined.
Company may be informed however, that we would be prepared to reassess the overall position in early April next by which time the Wharf Rd project will be that much further advanced, and clearer indications available as to final costings. If at that time we feel comfortable with our security position and are satisfied with debt servicing up to that time, then I would be prepared to favourably consider making further funds available for working capital, but without any commitment at this stage.
Company to be informed that we consider our stance reasonable in all the circumstances, and also, that we consider the funds of almost $216,000 now being made available should, along with the $200,000 said to be available from balance of damages payment, be adequate for their working requirements over the next 3/4 months when position can be reviewed.”
On 28 December, Mr Gardiner wrote to PEP to say that the $3m debt repayment had been applied to accounts as requested, that some but not all of the term deposits would be released, that PEP would be granted an overdraft of $100,000, that the Gold Mastercard of Peter Phontos would be reinstated and that the provision of bank guarantees to certain trade suppliers would be considered. The release of the guarantee given by Michael Phontos and any change in the system of making progress payments were not accepted. Mr Gardiner indicated that the Bank would reassess the position in three months time.
The letter went on to request further cash flow budgets. In accordance with this letter, an overdraft limit of $100,000 was granted to PEP.
On 22 December 1989, the Bank drew down $3m from the bank bills which had matured on that day. The Stock Exchange Branch was directed to delete the stop on the remaining funds.
Between January 1990 and early March 1990, Mr Gardiner permitted cheques to be drawn and placed to the debit of PEP's overdraft without invoices having to be provided. During that period, moreover, Mr Gardiner continued to make direct payments to certain suppliers. On 23 January 1990, a progress claim drawn by Mr Costas upon a percentage completed basis was lodged. An amount of $129,620 was paid after deducting payments which the Bank had made directly to suppliers such as Boral Steel. However, the relaxation did not overcome all the problems being encountered. During this period, the Bank dishonoured cheques drawn in excess of the $100,000 limit on PEP's overdraft.
In early February 1990, a building site at Linsley Street, Gladesville came on the market. Michael Phontos incorporated Dovizo Pty Limited for the purpose of carrying on a development on the site. On 21 February 1990, a deposit of $60,000 was paid for the acquisition of the Linsley Street site at a price of $600,000.
During February, Mr Mason and Mr Gardiner came to view the development at Wharf Road. Peter Phontos, who was irate, informed Mr Mason that he was not welcome on the site as PEP’s cheques were being dishonoured. Mr Mason withdrew.
About mid-March 1990, Mr Gardiner informed Peter Phontos that his superiors insisted that the invoice system be adhered to.
On 21 March 1990, Mr Gardiner wrote an internal memorandum which I shall set out as it seems to reflect the problems which were occurring at that time:-
“We refer to our recent telephone discussion with your Mr Mason and confirm the liquidity position of the Phontos group is becoming critical. In our opinion if the Bank does not approve some assistance along the lines recommended below, the Phontos group will be unable to continue operating any longer than two weeks approximately from today.
The financial squeeze has developed because numerous cheques have been dishonoured to keep customer within proximity of the approved overdraft of $100,000. As cheques have been returned, the word has spread around the building trade that P & E Phontos is a bad risk as for as supplying materials or labour. Credit has dried up and everybody wants cash in advance or a bank guarantee. Phontos needs to complete the work at Wharf Rd before the bank approves a progress payment and does not have the financial resources to pay immediately or in advance.
...
We have endeavoured to assist the Phontos group in the following ways to overcome their liquidity problems:-
a)Progress payments have been made against invoices where we have issued Bank guarantees.
b)Progress payments have been effected after personal inspections by us have identified completed work according to our detailed schedule.
c)Weekly wages have always been paid.
d)Some excess has been allowed on the overdraft limit from time to time when we know a payment is close or a deposit is to be lodged.
These steps are no longer sufficient as cheques are coming back as bills for collection.
We expect another claim for a progress payment of approx. $60,000/$70,000 shortly but it will do little to relieve the account which is already $30,000-00 approx over the limit.
...
Phontos & Co Pty Limited is currently negotiating purchase of a large building site in Linsley St Gladesville for $550,000 approx. where they intend to build their next block of units. The site is close to the Gladesville shopping centre and RSL club and is attractively priced. Funds held in commercial bills at Stock Exchange branch have been set aside for the purchase.
Mr Peter Phontos is an old time builder who believes in honesty and honouring your commitments, is finding the strain of dealing with unpaid contractors and suppliers almost too much to handle. Phontos & Co P/L now intends to place Mr Eddie Randle who is a very experienced builder and financial controller in charge of the project. ...
This move is a step in the right direction as the Wharf Rd project needs strong management and firm cost control to complete within budgetary estimates. Despite this positive step, it is obvious to us that Mr Randle cannot succeed unless the Bank takes realistic steps to assist in overcoming the liquidity crisis.
We recommend that the following steps be taken by the Bank to ensure completion of the project:-
a) Property Valuations Dept be requested to revalue the work completed on the Wharf Rd project. The last valuation carried out on 14/8/89 when there was little more than foundations completed and almost $1 million had to be deducted from our valuation for contingency allowances.
b) Bank approve release of Term Deposit (217150039709) for $105,521 on receipt of company undertaking that proceeds will be applied only payment of Wharf Rd building costs.
c) Bank approve additional Bank Guarantees up to $100,000 F/O material suppliers or work performance contractors. Payment will be against invoice and will be deducted from loan funds outstanding and already allocated.
d) Some flexibility be allowed to continue with overdraft limit to pay wages and effect payment of some urgent costs possibly 1/2 days prior to a progress payment being effected.
Your urgent attention to this matter would be most appreciated.”
PEP still had $375,000 in bank bills at the Bank's Stock Exchange branch. Peter and Michael Phontos sought to open a cheque account at that branch so as to use those funds. That request was refused. A bank cheque for $75,000 from the bank bills was deposited in an account in Peter Phontos’ name at the Gladesville branch. This was used to cover emergency expenses. PEP still had outstanding creditors. Shortly thereafter, on 11 April 1990, the remaining $300,000 approximately from the bank bills was paid into an ANZ account in Martin Place. It will be seen that, despite the problems which the Phontos group was having in completing the Wharf Road project, the group was not prepared to use their own funds to overcome their liquidity problems and the group was still desirous of undertaking additional developments.
A further valuation was carried out by PVD. It confirmed the earlier approach that the units would achieve sales of around $200,000 each, giving a gross realisation potential for the 15 units and dwelling of $3,300,000 less legal and selling expenses of $82,500 and a net potential “on completion” of $3,217,500. PVD valued the development on an “in one line on completion” basis at $2,290,000.
Subsequently, Mr Mason recorded in a memorandum to the Gladesville Branch dated 9 April 1990:-
“Valuation/contingencies have not changed and as such, we would not be prepared to release any of the term deposit funds held as security.
...
Likewise, the Bannerman Street Cremorne properties were to be sold and proceeds applied in permanent reduction of the Parras Holdings Pty Ltd FDL.”
In April, Michael Phontos produced a document entitled “Notes re release of term deposits” which alleged that the $3m had been made available in consideration of the representation by Mr Gardiner on 5 December 1989 of certain matters including a representation that all the term deposits held by the Bank would be released. On 20 April 1990, Mr R.A. Mullins, Deputy Regional Manager of NMZ, saw Michael Phontos and his accountant, Mr Theo Lianos. A further $303,000 was sought to complete the Wharf Road project, $600,000 was sought to complete settlement of the Linsley Street property on which notice to complete had been issued, and funds were sought for Ashburn Place. The notes were produced at his meeting and release of the term deposits was requested.
Shortly thereafter, a further cash flow was received from Michael Phontos. The cash flow included projections for the Linsley Street and Ashburn Place projects, which did not proceed. There was also an individual projection for the Wharf Road project. This showed the liability to the Bank reaching $2,903,000 in July and August 1990, decreasing thereafter as sales were made. The facility limit was noted as being $2.6m but it was, of course, only $2.5m. It was noted in the cash flow that the increase in building costs was mainly attributable to the delay in obtaining the development approval and building approvals while the balance of the increase was attributable to construction delays as a consequence of abnormal wet weather. No complaint was then made about the invoice system, perhaps because Michael Phontos wished to keep on good terms with the Bank.
On 27 April 1990, there was a meeting between Michael Phontos, Mr Lianos and Mr Mason. The general position was discussed. Mr Mason said that he would be prepared to consider increasing the limit on the Wharf Road project to $2.9m to enable that project to be completed and to release the remaining term deposits so that the purchase of Linsley Street could be completed but only on the condition that the purchaser of Linsley Street, Dovizo Pty Ltd, provided a mortgage back. Michael Phontos gave evidence that Mr Mason said that he would not increase the funding on the Wharf Road property unless the applicants put up that security or other security. I do not accept that the tenor of the conversation was as Michael Phontos has deposed. Mr Havron was also present at that meeting. A memorandum by him on 2 May 1990 sets out what I consider to be the substance of the conversation. It was a meeting at which funds were sought for the purchase of the Linsley Street property. In the course of that meeting, a cash flow projection which had been shown peaking at $2.9m was discussed. Mr Havron noted:-
"While further discussion ensued, it was finally agreed that we would consider release of all term deposit funds to complete settlement of Linsley St in exchange for a first registered mortgage over same property.
Additionally it would be insisted upon that the Bank would reserve funds ($31,000) from term deposit to meet Group tax instalments due 31/4/90 & 17/5/90.
..."
Mr Havron recommended:-
"... that we approve substitution of security and increase in progressive FDL No 1 to $2.9M on basis proposed ... "
Mr Mason noted on the memorandum that:-
"Substitution of sec [security] .... places us in a stronger position ... The increase in F/D/L No 1 commitment ($300000) to $2.9m Prog. is of necessity to permit completion of the Wharf Rd project".
On 4 May 1990, Mr Mason wrote confirming the arrangement that had been made whereby the Bank would release two term deposits totalling $375,000 to enable a payment of $21,000 to be made to the Taxation Department leaving funds of $344,000 to be put towards the purchase of Linsley Street. The Bank was to take a mortgage over Linsley Street to secure all liabilities. He noted that:-
"We reaffirm that the Bank makes no commitment to finance any future development. We will however agree to consider a proposal in principle providing the approach is made in the proper manner and the Bank is given sufficient time and information to formulate an application and consider a decision which will include satisfactory costing and valuation by our specialist staff."
Mr Mason confirmed approval for increase in FDL1 to $2.9m to assist with the completion of the Wharf Road project. He also wrote that, to ensure progression of the work at Wharf Road, on a trial basis funds would be released on weekly presentation of listing of amounts to be paid during that week and confirmed by invoices at the weekend. The letter of 4 May mentioned again that the Bank was expecting the sale of the Cremorne units.
In May 1990, a lift for the Wharf Road development, which had been ordered, arrived at the shipping dock. The suppliers required a payment of $35,000. Mr Gardiner refused payment of this sum as there was only $30,000 left of the construction funds. The lift, therefore, could not be acquired at that time.
In early May 1990, Linsley Street was purchased using the term deposits which had been released and the cash which remained from the bank bills. Because the cash was so used, the Phontos group thereafter had no funds available either to develop Linsley Street or to assist with the Wharf Road development.
On 8 June 1990, Mr Gardiner noted that Peter Phontos estimated that the whole job would be completed by the end of July and had promised to provide new costing estimates. On 4 July 1990, Peter Phontos informed Mr Gardiner that the work would be completed by mid-August. Mr Gardiner impressed on him that, despite numerous requests, the new costings for the construction had not been received from Michael Phontos.
On 6 July 1990, when the necessary application for accommodation and supporting documents had been received from Parras, Mr Stevens entered the additional $400,000 in the funding register. Prior to this date, he had allowed the register to move into debit to some extent.
On 9 July 1990, Mr Gardiner telephoned Michael Phontos who said that the costings were not completed. Mr Gardiner suggested that this was because it was not possible to complete the job within a $2.9m budget. Mr Michael Phontos replied that savings could be made by not installing ovens until the units were sold. Mr Gardiner suggested that the work on the house could be deferred. Michael Phontos agreed to discuss final cost estimates with his father.
On 12 July 1990, Mr Gardiner visited the Wharf Road construction site and discussed with Mr Peter Phontos the rapidly diminishing funding position and the failure of Michael Phontos to provide accurate costings for the work outstanding.
On 14 August 1990, the Bank received a document headed “Final Forecast/Cost to Complete” in respect of the development. The accompanying letter of 14 August went on to say:-
“The total of the forecast budget of $1,668,076.31 less the original budget of $1,419,000 is the total of the `Profit/Loss’ column, being - $249,076.31, which, represents the additional monies now required in addition to the original advance required to complete the development.
...
Accordingly, we request additional funding of $249,076.31 for the completion of the development. “
On 15 August, Mr Stevens wrote in a memorandum that he did not feel that the amount required could be accurately established from the figures provided and he recommended that Michael Phontos be required to provide the Bank with a more detailed list and costing of all outstandings.
About that time, Peter Phontos drew a number of cheques on PEP 2 which exceeded its limit of $100,000. These cheques were dishonoured. Peter and Michael Phontos were made aware of the fact that, with the debiting of interest, the limit of FDL 1 had been reached. By this time, the project was moving very slowly. Peter Phontos and Harry Costas could not keep all the trades on site but managed to keep a number of trades operating at a low key level. In August 1990, Mr Gardiner informed Peter Phontos that the Bank required further details of the cost to complete the construction. Taking into account both interest and expenditure, the available funding was exhausted by 17 August 1990. Thereafter no funds were made available by the Bank until the FDL 1 was again increased on 1 November 1990.
(vii) Christmas Shut-Down
The construction was closed down during the Christmas period of December 1990 to January 1991 for 1.5 weeks. The applicants rely upon this period only insofar as they establish that, but for the Bank's method of releasing funds, the project would have been completed well before Christmas 1990.
(viii) 26 April 1991 - 4 July 1991
During the eleven weeks from 26 April 1991 to 4 July 1991, there was no funding. During this period again, the limit of the facility had been reached. On 17 May, Phontos & Associates wrote to Mr Cox, the then General Manager of NMZ, and requested further accommodation. The letter made a number of complaints about the Bank's conduct but went on to request funding to enable the Phontos group to complete the Wharf Road development and to bring a successful action against the architects involved in the Ryde project for the Housing Commission.
The matter was reviewed by Mr Creighton-Carr, Manager Branches. On 4 June 1991, he noted that:-
"Essentially the Phontos' have again run out of funds and the Wharf Road project remains incomplete."
Mr Creighton-Carr considered that the application for accommodation should be refused as:-
"As can be seen from the sequence of events, CBA has been more than patient with this connection and the continued threats are wearing thin. As is expected, the Phontos' despite numerous requests from the branch have not come up with any `costings' or any specifics with what level of accommodation they require this time."
That was followed in June 1991 by the dispute as to the legal costs and estate agents' fees which Michael Phontos wished to retain out of the settlement proceeds on Unit 8 of Wharf Road. There was a luncheon meeting between the parties on 25 June 1991. In that conference, it was proposed that the Bank should release funds for the installation of PC items once each unit had been sold. On 25 June 1991, Mr Cox wrote to Parras dealing with the matters in issue. The letter has earlier been set out.
Once again, I think that this was an occasion when there was a lack of funding and a disagreement between the Phontos group on the one hand and the Bank on the other as to how funding for the construction should be provided. The Bank was not obliged, under its contractual arrangements, to provide such funding. In my opinion, its conduct during this period was neither unconscionable nor unfair.
(ix) 5 July 1991 - 14 October 1991
During this period of 15 weeks, funding was provided under the PC system. Funds were released by the Bank for PC items after the units had been sold and prior to settlement date. Again, I see nothing unconscionable or unfair in the Bank's approach to this. The result was that the Bank contributed more to the construction costs than it had earlier agreed to do. One might surmise that it may have been preferable to complete the development at an earlier stage. However, the Bank chose not to put in the final money until it was necessary to do so, acting similarly to Michael Phontos, who for his part, was not prepared to sell the Cremorne unit which he occupied unless he was forced to do so.
(x) Wet Weather
The experts agree that 8 calendar weeks were lost for wet weather, public holidays and rostered days off. This was an ordinary incident of construction.
(xi) Program Slippage
Nine calendar weeks were lost for program slippage. This was a problem which could be encountered in any development.
(xii) Delay due to the manner in which the funds were released
The experts have calculated that the balance of the 84 weeks, namely 17.5 weeks, was lost due to the manner in which funds were advanced under the invoice system.
There is no doubt that the invoice system caused trouble and delay. It was very inconvenient that tradesmen should have to produce an invoice to the Bank and that an officer of the Bank should have to view the invoice and relate it to funds available under a particular heading of the release record before the payment could be made. Mr Stevens gave this evidence in cross-examination:-
"You had never seen such a provision, I suggest, in your time at the Bank, had you, in any facility or in any facility to a developer, I am reminded?---I may have once previously.
Had you ever before this time seen a line of people including any form of tradesmen or sub-contractor who might have delivered sand or done some electrical work queuing up at the Bank with invoices for the Bank to certify, stamp and then pay? Have you ever seen anything like that in your life before?---No."
Mr Gardiner gave this evidence:-
"Did you actually have workmen coming into the bank to get their money with invoices?---Not initially but as the project got further developed particularly in 1990 it became more frequent and it became a very onerous task sometimes because it is a very traumatic circumstances, you know, young men they had to get paid, they had committed materials, they had wife and kids to pay and stuff like that and they had invoices and it's out the bank and I had to kind of drop everything and go through all this and try and work out where it was, ring back Peter Phontos if necessary and clarify it if I couldn't fit it into a category. Then if I could possibly pay it I did. I then gave the invoice to Ian Stevens who then processed the payment."
Tradespeople expected payment on delivery. On one occasion, a concrete pour did not proceed because the driver did not have the appropriate invoice and no guarantee arrangement was in place. Another example of the delay which occurred was that the lift first became available in May 1990 but could not then be taken up because funds were not available. It was finally delivered to the site in January 1991. Even then its installation and commissioning was slow due to the shortage of funds available for completing the task.
The invoice system changed a little from time to time. It was relaxed after the Bank had received the $3m in December 1989 but was reimposed on 6 March 1990. On 4 May 1990, NMZ approved an arrangement whereby funds could be released on the undertaking of the applicants to produce the relevant invoices at the end of the week. That change was made after Mr Gardiner had developed confidence in Harry Costas. However, the experts have estimated that 17.5 weeks was lost due to the way in which funds were released and one can see that the invoice system would have contributed to that result.
I think it would be simplistic to conclude that the invoice system was the sole or even the major cause of this delay. It is clear that, from the time the Bank commenced dishonouring PEP's cheques in the first half of 1989, the reputation of the Phontos group must have deteriorated. When this was combined with the invoice system, there must have been doubts in the trade as to the solvency of the Phontos group and, at any rate, a view that the Phontos group were not good payers. The result would probably have been that the Phontos group did not receive the best service from tradespeople. Peter Phontos has given evidence of this.
In the ordinary situation, the developer has either credit or funds which keep the project moving smoothly. The financier contributes funds after an assessment has been made of the work done. In the case of the Wharf Road development, once a limit had been put upon PEP's overdraft, the applicants did not generally have available either credit or ready access to moneys so as to keep the construction moving. The Phontos group lacked the capital which was necessary to ensure a smooth development. When the applicants had access to the funds arising from the settlement of the Housing Commission, they used those funds principally for purposes other than the Wharf Road project. The Phontos group put themselves into the position where they needed funds from the financier, the Bank, before work could be carried out. Had the Phontos group had the necessary capital or credit, there would have been no difficulty with tradespeople even under the invoice system. The construction would have gone ahead and PEP would have presented the invoices to the Bank at regular intervals, say once a month. The invoice system did not necessarily involve anyone in any difficulty. It was the inability of the Phontos group to be able to obtain credit or to pay tradespeople before claiming funding from the Bank which caused the problem.
Of course, the officers of the Bank understood generally what the financial position of the Phontos group was when the Mason conditions were imposed. Yet the full position had not been openly disclosed and discussed. The cashflows provided had included receipts from projects which the Bank had not been asked to or had not agreed to finance. The Bank knew very little about the claim against the Housing Commission. Moreover, the applicants did not propose any significant alternatives to the invoice system so as to protect the Bank.
Mr Gardiner devised a system that he considered was the most practical way of dealing with the matter. He gave this evidence:-
"I hadn't struck that before where I had been instructed by my head office. I have had much smaller loans where I've had my own control over and I've wanted to sight invoices but not from head office, no.
...
Well, the system that they had initially was the bank valuers do the valuation. I found this very time consuming and working capital was the critical point, we had to get the payments made as soon as possible. I suggested to our point of control that it may be better if I did the valuations. I went out and actually monitored the work actually being carried out and kept a detail analysis of what's being done and what had to be done and then when the invoices came in we would marry them up against the work that I verified. You know, I'd go every week and do this and that way I could pay the invoices on the spot plus subcontractors who were constantly coming into the bank wanting payment. I could authorise the payment. My point of control wasn't very keen about that idea initially but then I think they realised that the job was going to get done this as the most practical way of doing it and that's how eventually that system came in and for the most part of the entire construction that's exactly what took place."
I am satisfied that Mr Gardiner was an efficient bank manager who dealt with the difficult position with which he was presented in a practical way. Mr Hill of CLS had first introduced the invoice system in June 1989 to ensure that funds released were spent on the Wharf Road project. His view, and that of Mr Mason, was that such a control was essential in the circumstances.
The problem was that, unless closely supervised, Peter Phontos would draw cheques as he saw fit on PEP's account. The Bank formed the view that he should no longer do so and that PEP should not be permitted to draw as it wished on its overdraft. The Bank decided to ensure that moneys drawn from the Bank were spent on the Wharf Road development. The invoice system then became the feasible means of completing the development.
In my opinion, the Bank's actions in this regard were not in breach of its contractual arrangements, were not negligent, were not unfair and were not unconscionable.
A complaint made in the statement of claim is that the Bank refused to give a bank guarantee to Boral Steel, notwithstanding that the giving of such guarantees was in principle approved by Mr Mason at the meeting on 30 August 1989. However, what the Bank refused to do was to give a guarantee of "$50,000 for 12 months in favour of Boral Steel". Mr Mason refused the request "unless it specifically relates to the supply of steel for the Wharf Road project." That, of course, was an appropriate restriction. The Bank did guarantee payment to a number of suppliers including Boral Steel provided that the material supplied was delivered to and used in the Wharf Road development.
In addition to problems arising from the invoice system, there were delays from time to time which were caused by the need which the Bank saw to obtain further information. For example, there is a memorandum of 3 October 1989 under the hand of Mr I.P. Cummerford, Acting Manager of the Gladesville Branch, which said that Peter Phontos and Harry Costas had been informed that the release of further funds would be frozen until they produced the cashflow which the Bank had sought and had a paid-up increase on the insurance cover. Other delays occurred from time to time as the Bank sought information about the applicants' position or the likely costs of completion of the development. I do not see anything negligent, unfair or unconscionable in these matters.
MISREPRESENTATION, TRADE PRACTICES ACT, ESTOPPEL
Many individual claims of representations have been made based upon, among others, terms contained in the terms sheet of 31 August 1988, upon the conduct of the Bank in agreeing to finance the facility and upon statements alleged to have been made by Mr Robinson to Mr Phontos before the applicants took up the facility or by Mr Gardiner in the meeting of 5 December 1989 or by other officers of the Bank such as Mr Marshall in conversation with Michael Phontos. Non-disclosure is also relied upon.
I am not satisfied that there was any innocent misrepresentation, any deceit or any breach of the Trade Practices Act 1974 (Cth) by the Bank or any foundation for the existence of a relevant estoppel against the Bank which would found a claim against it. I have already dealt with the allegations made with respect to the “off the record” conference of 5 December 1989.
I have not found it necessary to give attention to the limitation period set out in s.82 of the Trade Practices Act.
I have given consideration to s.51A of the Trade Practices Act but not I am not satisfied that, even with the assistance of that provision, any representation was made which was misleading. I need not discuss s.51AA of the Act as I am not satisfied that the Bank engaged in any unconscionable conduct. That section was not introduced, in any event, until 1992. Section 51AB was introduced in 1986 with the then numbering of s.52A. I have not found it necessary to consider whether the activities of the Bank involved the provision of services.
I do not propose to deal with all the allegations individually. It is, for example, alleged that the Bank represented that the project would be valued on an "on completion basis", that the Bank did not make the valuation on that basis, which the applicants relied upon the representation and changed their position accordingly, that if the applicants had been aware that the Bank would not make its valuations on that basis they would not have entered into the facility and so on. Misrepresentation or misleading conduct is alleged and it is also alleged that, statements having been made which the applicants relied upon, the Bank is estopped from resiling from those statements.
I am not satisfied that there was any statement made to the applicants or any conduct by the Bank or its officers which was misleading or deceptive or likely to mislead or deceive. I have already set out earlier in these reasons my view that the evidence of Michael Phontos is not reliable and my view that his evidence as to his assumptions and as to the steps that would have been taken if he had been aware that the assumptions were wrong is also unreliable. I am not persuaded that the facility would not have proceeded entirely in accordance with the terms set out in the terms sheet of 31 August 1988 had the applicants had the necessary funds to progress the Wharf Road development. But, of course, it turned out that the applicants did not have those funds and that PEP developed an overdraft of over $1m by spending money on matters other than the Wharf Road development before that development got underway. It was that circumstance which principally led the Bank to act throughout the progress of the Wharf Road development otherwise than in accordance with the terms which had originally been agreed.
By way of example of the allegations made in respect of representations, I set out the following allegations made in paragraph 116 of the Statement of Claim:-
"...
(ii)that the valuation to be made by the Bank's valuers pursuant to the Valuation Condition would be made in accordance with the On Completion Basis;
(iii)that for all purposes any valuation made and/or adopted by the Bank pursuant to the Valuation Condition would be on the basis of the On Completion Basis;
(iv)that prior to taking the Security or releasing any funds under the Advance the Bank would satisfy itself that the Relevant Applicants had complied with and satisfied the Valuation Condition;
(v)that the Bank would not require to satisfy itself with respect to the costing of the construction of the Development and/or the plans, specifications and approvals of the Development;
(vi)that the Primary Securities would be taken by the Bank pursuant to the terms of Contract 1;
(vii)that during the currency of the Advance additional security would not be required;
(viii)that the Construction Funds would be released by way of architects or quantity surveyors certificates;"
Paragraphs 117 to 119 of the Statement of Claim allege:-
"117.Acting upon the Security Representations and induced thereby, on 5 September 1988 the Relevant Applicants entered into Contract 1, on 15 September 1988 the Relevant Applicants granted the mortgages and guarantees referred to in paragraph 16, and on or about 12 October 1988 accepted Variation 1.
118.But for the Security Representations the Relevant Applicants would not have entered into Contract 1, granted the mortgages and guarantees referred to in paragraph 16 or accepted Variation 1.
119. The Security Representations were false."
These claims are made under the heading "the Security Representations".
No purpose would be served in dealing with each of the allegations. Insofar as allegations were based on terms set out in the terms sheet, I am satisfied that the terms were proposed in good faith. There was nothing misleading or deceptive about them. The Bank's officers had no reason to think that the terms would not be complied with insofar as they required the Bank to do something. Insofar as the allegations go beyond what was said in the terms sheet, they are ill-founded.
Another claim is:-
"132.At all material times the Bank allowed the Applicants (except Dovizo and Spotek) to proceed upon the assumption and belief:-
(a)that the Bank had valued and adopted a valuation of the Development upon an `on completion' basis;
(b) that the Bank had satisfied itself with the feasibility of the Development;
(c)that the Bank would perform Contract 1 (as varied) without requiring to satisfy itself with respect to the Development and Building Approval of the Development or with the costing of the construction component of the Development in order for it to make the Advance;
(d)that the Bank would perform Contract 1 (as varied) without requiring further security other than the Security unless it provided additional accommodation to the Advance;
(e) that the Security Representations were true;
(the `Contract 1 Assumptions')
...
133.In reliance upon the Contract 1 Assumptions the Relevant Applicants acted to their detriment in granting the Primary Securities as they were thereby deprived of seeking alternate finance to the Advance and deprived themselves thereafter of dealing with the Security.
...
134A.In reliance upon the Contract 1 Assumptions the Applicants acted to their detriment in building up the excesses recited in paragraph 183A upon the bases and in the beliefs recited in paragraph 183A(c)."
These allegations seem to me to be without foundation. The applicants had contracts with the Bank and the relationship between the parties was governed by that. The applicants were happy to accept the terms set out in the terms sheet and they did so. They had no justification for concluding that PEP could run up an overdraft of over $1m without the Bank's requiring action to be taken to regularise the position. I do not accept that the applicants acted to their detriment because of any representation made by the Bank and its officers. In particular, I do not accept that the applicants built up PEP's overdraft because of anything that was said or done by the Bank's officers. The applicants at all times were aware of the limit of the approved overdraft.
BREACH OF FIDUCIARY RELATIONSHIP
The relationship between the Bank and those who provided the securities, the guarantors and the mortgagors, was such as to require appropriate disclosure by the Bank. In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462-3, Mason J, after discussing the principles of unconscionability, said:-
"Because times have changed new situations have arisen in which it may be appropriate to invoke the underlying principle. Take, for example, entry into a standard form of contract dictated by a party whose bargaining power is greatly superior, a relationship which was discussed by Lord Reid and Lord Diplock in A. Schroeder Music Publishing Co. Ltd. v. Macaulay [1974] 1 W.L.R. 1308, at pp. 1314-1315, 1316; [1974] 3 All E.R. 616, at pp.622-623, 624. See also Clifford Davis Management Ltd. v. W.E.A. Records Ltd. [1975] 1 W.L.R. 61, at pp.64-65; [1975] 1 All E.R. 237, at p.240. In situations of this kind it is necessary for the plaintiff who seeks relief to establish unconscionable conduct, namely that unconscientious advantage has been taken of his disabling condition or circumstances.
Of course the relationship between the present parties and the transaction into which they entered were by no means novel, viewed as a situation to which the general principle can apply. That the principle might justify the setting aside of a guarantee is established by decisions such as Owen and Gutch v. Homan (1853) 14 H.L.C. 997, at pp.1034-1035 [10 E.R. 752, at p.767] and Bank of Victoria Ltd. v. Mueller [1925] V.L.R. 642, at p.649.
To say this involves no contradiction of the well-entrenched proposition that a guarantee is not a contract uberrimae fidei, that is, a contract which of itself calls for full disclose. However, it is accepted that the principal creditor is under a duty -
`... to disclose to the intending surety anything which has taken place between the bank and the principal debtor "which was not naturally to be expected", or as it was put by Pollock M.R., in Lloyds Bank Ltd. v. Harrison (1925); Unreported cited in Paget's Law of Banking, 7th ed. (1966), p.583 "the necessity for disclosure only goes to the extent of requiring it where there are some unusual features in the particular case relating to the particular account which is to be guaranteed"'
(Goodwin v. National Bank of Australasia (1968) 117 C.L.R. 173 at p.175, per Barwick C.J.)."
However, there was not any failure on the Bank's part to keep the mortgagors and guarantors informed of relevant matters. I have already made the point that the Bank was not bound to satisfy the guarantors and mortgagors as to the valuation of all the securities before the securities were executed. I have also made the point that the Bank was not bound to disclose to the applicants what were the valuations which it obtained. It could rely upon the precondition as to the valuations achieving $6.4m or it could waive the condition, which it ultimately did. There is no allegation that the mortgagors or the guarantors were released when the valuations came in at a lesser figure and the Bank waived the condition.
It should be kept in mind, moreover, in relation to questions of the values of the security properties and the cost of construction, that the Bank's officers were dealing with persons who were experienced in the field. There was nothing in their position which put any obligation on the Bank to keep the mortgagors, the guarantors or the applicants aware of the views of the Bank's valuers.
It is alleged that, from approximately mid-1989, the Bank's officers failed to disclose their view that the proceeds of the Wharf Road development and the other available assets would not be sufficient to repay the group's indebtedness. However, this allegation puts the matter too highly. Different Bank officers had differing views as to what the result of the Wharf Road development would be. In mid-1989, no Bank officer knew what the result of the claim against the Housing Commission would be. The applicants were in as good a position as the officers of the Bank to make their own judgment about these matters.
It is alleged that, by permitting the group to increase its overdraft, the Bank led the applicants into the belief or assumption that the profits from the sale of the Wharf Road development would be sufficient to repay the group's liabilities. However, the Bank did not induce or encourage that belief. The applicants were always more fully aware of the position of the Phontos group than were the officers of the Bank.
It is also alleged that the Bank had a fiduciary duty to the applicants and the Bank breached that duty.
Paragraph 161 of the statement of claim alleges:-
"161.In breach of the said duty the Bank preferred its own interests to those of the Applicants:-
(a)in requiring further security for the Advance;
(b)in imposing the Invoice System, the Further Invoice System and the PC Payments system and by requiring PEP by virtue of the Expenditure Control to operate upon its overdraft more than otherwise would have been the case, or alternatively, was unable to reduce its overdraft from time to time by depositing to the credit thereof the progress payments it otherwise would have received upon the payment by Parras of its progress claims;
(c)in placing the Stop Order on the Bank Bills and requiring the Authority for disposal of the funds before the Bank Bills matured but not informing PEP of same; and
(d)in maintaining the Security but delegating staff to administer the Advance who were not competent, experienced and skilled and who impeded the timely completion of the Development."
In seeking further security, in imposing the invoice system, in ensuring that the $3m was paid to it under the bank bills and in engaging staff to administer the advance, the
Bank was not in breach of any duty which it owed to the applicants. As between the Bank and the applicants, the general rules as between banker and customers applied. The relationship was essentially one of contract. Of course, bankers can be fiduciaries, having regard to the circumstances of a particular matter, and they may come under fiduciary duties or duties analogous thereto because of a special disability or disadvantage in the person with whom they are dealing, as Amadio shows.I have examined the facts with a view to ascertaining whether or not there were circumstances whereby the Bank came under a duty to make a disclosure which it failed to make or whereby it acted in its own interests unfairly to the applicants. It does not appear to me that there is any matter in respect of which the Bank breached a fiduciary duty or a duty analogous thereto.
NEGLIGENCE
It is alleged that the Bank failed to exercise reasonable care and skill in the management of the facility and failed to act fairly and honestly towards the applicants. Such claims appear throughout the statement of claim. It is sufficient, I think, to set out paragraph 154 of the statement of claim which provides:-
"154. The Bank was negligent in the performance of its said duty.
PARTICULARS OF NEGLIGENCE
(i) Failure to advance the Construction Funds in a timely manner.
(ii) Failure to manage the Advance in a fair and proper manner.
(iii)Requiring the Applicants, or some of them, to realise part of the Security contrary to the terms of Contract 1 and/or Contract 1.
(iv)Imposing conditions on the drawdown of the Construction Funds which had the effect of impeding the progress of the construction of the Development.
(v)Imposing conditions on the advance of additional funds which had the effect of impeding the realisation of the units in the Development.
(vi)Failure to ensure that competent, experienced and skilled managers performed the obligations of the Bank pursuant to Contract 1.
(vii)Failure to inform the Applicants that the Bank might not accede to all of the terms and conditions specified by P. Phontos, M. Phontos and H. Costas on 5 December 1989, prior to PEP executing the Authority.
(viii)Failure to administer the Advance in a way suitable to or applicable to a construction contract."
In my opinion, none of these allegations have been established. I have dealt with most of the matters under the heading of "Funding" and I need not repeat what I have said. In my opinion, the Bank did not act negligently or other than fairly and honestly when it imposed the invoice system. There was a problem with which the Bank had to deal, namely, that the applicants could not be trusted to spend on the Wharf Road development the money which the Bank released. Mr Mason and Mr Gardiner considered that the appropriate way to deal with the matter was for the Manager of the Gladesville Branch to supervise closely what was occurring and to sight the invoices and to make payments against those invoices. This was an unusual requirement to impose, but it was imposed in special circumstances. Even then, it would not have caused trouble if the applicants had been prepared to put their own funds into the Wharf Road development so as to maintain a constant flow of work. It was the necessity to obtain a cheque from the Bank at a time work was being carried out and when materials were being delivered that caused much of the problem.
In my opinion, Mr Gardiner and Mr Stevens did not perform their tasks negligently. I am satisfied that they were both competent officers.
As to the allegation in 154(iii), it was a condition of the terms sheet of 31 August 1988 that the Cremorne units should be sold and the proceeds used to pay off the Parras facility. There was no negligence or breach of the contractual arrangements in relation to the realisation of securities.
In my opinion, there was no negligence on Mr Gardiner's part in the meeting of 5 December 1989, as alleged in 154(vii). The purpose of the meeting was to identify what terms and conditions could reasonably be put forward for the consideration of Mr Gardiner's superior officers. That was what occurred at the meeting.
I have not identified any matter on which the Bank should be held liable for negligence.
DEFENCES
I have not thought it useful to discuss a number of matters put forward by way of defence. Counsel for the respondent submitted, for example, that, if any unconscionable conduct of the Bank caused the applicants or any of them to enter into a transaction, the aggrieved party failed to repudiate that transaction but rather took advantage of it to complete the Wharf Road development. Counsel submitted that the applicants’ only relief was rescission, not equitable damages, and that the applicants could not rescind for they had acted on the basis of and taken advantage of the arrangements made.
It is not appropriate to consider such matters in the abstract. Having regard to my findings on liability, such issues are hypothetical.
ORDER
It follows that I have not identified any ground of liability which would entitle the applicants to an order in their favour. I shall not make any order at the present time. I have mentioned two aspects on which I would be prepared to hear further submissions if the applicants wished to put them. If there is any aspect of the statement of claim which the applicants consider not to have been dealt with, that aspect may also be raised. There is still the cross-claim to be dealt with. I shall adjourn the matter to an appropriate date to enable these matters to be attended to.
I certify that this and the preceding 161 pages
are a true copy of the reasons for judgment ofthe Honourable Justice Davies.
Associate:
Date: 24 October 1997
Counsel for the applicants: C.R. Einstein QC with
P.L. Dodson and J.M. Hennessy
Solicitors for the applicants: Phontos & Associates
Counsel for the respondent: R.G. Forster SC with
N. Manousaridis
Solicitor for the respondent: Commonwealth Bank of Australia
Legal DepartmentDates of hearing: 4-5, 10-14, 17-18, 24-27 March 1997
3-4, 14-18, 23 April 1997
13, 15-16, 19-20, 22-23 May 1997Date of judgment: 24 October 1997
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