Perpetual Nominees Limited v Rytelle Pty Ltd (No. 4)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

S CI 2009 6858
List C

BETWEEN

PERPETUAL NOMINEES LIMITED (ACN 000 733 700)	Plaintiff
and
RYTELLE PTY LTD (ACN 105 101 639) (RECEIVERS AND MANAGERS APPOINTED) & OTHERS (ACCORDING TO THE ATTACHED SCHEDULE)	Defendants

AND BETWEEN

RYTELLE PTY LTD (ACN 105 101 639) (RECEIVERS AND MANAGERS APPOINTED) & OTHERS (ACCORDING TO THE ATTACHED SCHEDULE)	Plaintiffs to Counterclaim
and
PERPETUAL NOMINEES LIMITED (ACN 000 733 700) & OTHERS (ACCORDING TO THE ATTACHED SCHEDULE)	Defendants to Counterclaim

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JUDGE:	SIFRIS J
WHERE HELD:	Melbourne
DATE OF HEARING:	10–28 September 2012; 3–4 and 17–18 October 2012
DATE OF JUDGMENT:	5 February 2013
CASE MAY BE CITED AS:	Perpetual Nominees Limited v Rytelle Pty Ltd & Ors (No. 4)
MEDIUM NEUTRAL CITATION:	[2013] VSC 9

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CONTRACT – Loan – Guarantee and indemnity – Borrower failed to repay amount owing by due date – Counterclaim by borrower and guarantors for breach of contract by lender.

CONTRACT – Whether lender obliged to advance funds if request for drawdown not in proper form – Whether drawdown notice substantially in the form agreed.

CONTRACT – Loan – Whether lender obliged to advance funds if unremedied events of default exist at time of drawdown notice.

CONTRACT – Loan – Breach – Whether failure to remit GST constituted event of default.

CONTRACT – Loan – Breach – Whether agreement to permit borrower to retain GST refunds – Whether conduct of lender amounted to waiver or election to permit borrower to retain GST refunds.

CONTRACT – Loan – GST refunds – Whether part of refunds held on trust for lender – Whether borrower in breach of trust – Whether lender provided informal consent or ratification of breach.

CONTRACT – Loan – Breach – Whether pre-sales hurdle met – Construction of term relating to relevant pre-sales hurdle – Whether agreement to vary relevant pre-sales hurdle term.

CONTRACT – Loan – Causation – Whether any loss caused if lender in breach by failing to advance funds.

CONTRACT – Loan – Penalty - Higher interest rate imposed when repayments late – Whether higher rate was genuine pre-estimate of loss – Higher rate not extravagant and consistent with market rates.

MISLEADING OR DECEPTIVE CONDUCT – Whether lender misled borrower by stating that all funds due under loan would be advanced – Whether borrower had knowledge of lender’s financial position – Whether borrower relied on lender’s representation – Whether borrower suffered any loss.

APPEARANCES:	Counsel	Solicitors
For the Plaintiff/First Defendant by Counterclaim	Mr R. Moore	HWL Ebsworth Lawyers
For the Defendant/Plaintiffs by Counterclaim	Mr P. Bick QC Mr B. Gibson	Slater and Gordon
For the Second Defendant by Counterclaim	Mr P.H. Morrison QC Mr S.R. Senathirajah	Hall and Wilcox, town agents acting for McCollough Robertson

TABLE OF CONTENTS

A.Introduction............................................................................................................................. 1

B.The claim.................................................................................................................................. 2

C.The Counterclaim................................................................................................................... 3

Alleged failure to make available drawdowns.................................................................. 4
Misleading or deceptive conduct..................................................................................... 5
Alleged penalty................................................................................................................... 5

D. Summary of Issues and Conclusions................................................................................. 6

E. Failure to make available drawdowns............................................................................... 7

Introduction............................................................................................................................. 7
Failure to allow drawdown – Claim 12 ($59,188)......................................................... 10
Failure to allow drawdown – Claim 15 ($136,968)....................................................... 11

F.Failure to allow drawdown – Claim 16............................................................................. 14

Drawdown notice.................................................................................................................. 14
GST refunds....................................................................................................................... 21
The evidence............................................................................................................................. 23
Analysis.................................................................................................................................... 28
Was there an actual or potential event of default under the Loan Agreement?......... 28
The Borrowers response to the Event of Default and breach of trust........................... 29
Conclusion............................................................................................................................... 36
The pre-sales hurdles....................................................................................................... 37
Is clause 13.9 restricted to the sale of hotel suites?.................................................................... 40
Was the March Pre-sales Hurdle met?..................................................................................... 41
Could land pre-sales be counted towards the March Pre-sales Hurdle?..................... 42
When did verification of pre-sales need to be provided to MFS?................................. 46
Did the Forest Resort meet the March Pre-sales Hurdle?............................................... 48

G. Failure to allow drawdown – Claim 19............................................................................. 53

H. Causation............................................................................................................................... 54

Misleading or deceptive conduct...................................................................................... 61
Refinancing of the Facility................................................................................................... 62
Financing for FF & E............................................................................................................. 63
First REIT............................................................................................................................ 64
Negotiations with the Builder......................................................................................... 68

J. Interest at the higher rate of 16%....................................................................................... 68

K. Disposition............................................................................................................................ 69

HIS HONOUR:

A. Introduction

Perpetual Nominees Limited (“Perpetual”) commenced this proceeding against Rytelle Pty Ltd (Receivers and Managers appointed), the Forest Resort Operations Pty Ltd, Joan Pamela Walsh and James William Walsh as guarantors (“the Guarantors”) of financial accommodation provided to the Forest Resort Pty Ltd and the Forest Resort Hotel Pty Ltd (“the Borrowers”) by MFS Investment Management Limited (“MFS”)[1] (“the Claim”). No claim is made against the Borrowers.
[1]Perpetual acted as agent of MFS and as Custodian of the scheme property of the Premium Income Fund (see footnotes 2 and 3) pursuant to a Custody Agreement.

The Borrowers were the developers of a hotel and conference facility and a multi-stage residential development and golf course in Creswick, Victoria (“the Forest Resort”).

Until 29 March 2008, MFS was the Responsible Entity of the Premium Income Fund (“the Fund”). On 29 March 2008 MFS changed its name to Octaviar Investment Management Limited. On or about 13 June 2008 Octaviar Investment Management Limited changed its name to Wellington Investment Management Limited (“Wellington IM”). On 15 October 2008 Wellington Capital Limited (“Wellington Capital”), a new entity, became the Responsible Entity of the Fund. It holds an Australian Financial Services licence and manages the Fund pursuant to that licence.

Wellington IM is in liquidation. It was the Responsible Entity of the Fund at all relevant times.[2] As noted above, the Responsible Entity of the Fund changed from time to time and with effect from 15 October 2008 Wellington Capital (“the New RE”) became the Responsible Entity.
[2]The Premium Income Fund was first known as The MFS Premium Income Fund and from 29 March 2008, as Octaviar Premium Income Fund until 9 June 2008.

Accordingly, the Responsible Entity of the Fund remained the same until 15 October 2008 when the New RE was appointed. All that took place was a series of name changes. At the time that financial accommodation was provided to the Borrowers, the Responsible Entity was MFS. It is convenient to continue to refer to the lender as MFS.

The Guarantors and the Borrowers (“Plaintiffs by Counterclaim”) have made a counterclaim against Perpetual and Wellington IM (“the Defendants by Counterclaim”).

The counterclaim against Perpetual and Wellington IM (conveniently referred to as MFS) essentially pleads claims for breach of contract and misleading or deceptive conduct. In summary it is alleged that MFS failed to provide the necessary and agreed funding in breach of its contractual obligations. It also pleads the falsity of various representations made by MFS to the Borrowers relating to its ability to provide ongoing funding to the Borrowers. MFS denies the allegations.[3]

B. The claim

[3]The counterclaim is appropriately brought against Wellington IM. It is the successor to MFS and the party potentially liable. Wellington Capital, an entirely new entity will only be liable if Wellington IM is liable and is entitled to indemnity out of the Fund (s 601FS Corporations Act). These matters are not the subject of this proceeding. An application to join Wellington Capital was refused on 8 May 2012 (see Perpetual Nominees Limited v Rytelle Pty Ltd [2012] VSC 209).

It is common ground that in or about August 2006, the Borrowers entered into two loan agreements (“the Loans”) with MFS to fund the construction and marketing of the Forest Resort:

(a)The first loan agreement was for a facility of $48,314,000;
(b)The second loan agreement was for a facility (initially) of $2,570,000 which was increased to $4,236,000 in October 2006;

(together “the Loan Agreement” or “The Facility”).

It is common ground that in or about August 2006, the Guarantors executed Deeds of Guarantee and Indemnity (“the Guarantee”).

It is also common ground that the Loans were to be repaid on 15 August 2008 at which time the amount owing was $34,943,795.88.

The Loans were not repaid and on 1 April 2009 Wellington Capital as the New RE appointed receivers and managers to the Borrowers. The receivers and managers took possession of all of the Forest Resort’s assets including the hotel, golf course and residential land.

Perpetual claims that the Loans were not repaid. It seeks to recover 40% of the amount of the Loans together with interest, pursuant to the Guarantee. Perpetual says that the amount owing as at 5 September 2012 is $29,428,757,[4] (which includes interest calculated at 16%).[5]
[4]Prior to the commencement of the trial 60% of the debt comprising the Loans was assigned to Asset Realisation Limited.
[5]The Plaintiffs by Counterclaim allege amongst other things that interest at the higher rate of 16% constitutes a penalty and is unenforceable.

Perpetual relies on a certificate of Mary Jane Greaves as prima facie evidence of the alleged indebtedness under the Guarantee in accordance with clause 25 of the Guarantee.

The only matter in dispute is the quantum of Perpetual’s claim. The parties have agreed that quantum is to be dealt with at a later stage, if necessary.

The Plaintiffs by Counterclaim submit that they have a substantial claim for damages and that if successful their claim will extinguish by way of set off the claim made by Perpetual. There is a dispute as to whether set-off is available in the event that the Plaintiffs by Counterclaim succeed in their claim for damages. Whatever the precise formulation of the legal relationship between claim and counterclaim it is convenient to proceed to the counterclaim.

C. The Counterclaim

The Plaintiffs by Counterclaim make three principal allegations against MFS.

I Alleged failure to make available drawdowns

It is alleged that in breach of the Loan Agreement, MFS failed to provide requested funds under the Facility within the time limits provided for in the Loan Agreement. Specifically, it is alleged (and this is the essence of the claim made by the Plaintiffs by Counterclaim) that MFS:

(a)was required to allow a drawdown of $1,502,888 by 31 January 2008 (Claim 16) but failed to do so; and
(b)was in default as at 26 March 2008 in having a cumulative amount of $1,090,342.50 outstanding under the Facility (Claim 19).

The Plaintiffs by Counterclaim contend that the consequences of this alleged failure was that:

(a)the Builder walked-off the site on 17 and 18 February 2008 without completing the construction of the hotel;
(b)it generated adverse publicity, which made it very difficult if not impossible to sell suites/units in the Forest Resort; and
(c)but for the cessation of sales, the Borrowers would have obtained funding from another lender at the expirations of the Loan Agreement.

The Plaintiffs by Counterclaim contend further that in breach of the Loan Agreement, MFS:

(a)failed to pay the sum of $59,188.00 in October 2007 because there was a shortfall of that amount as against the amount sought by the Borrowers on 27 September 2007 (Claim 12); and
(b)failed to pay the sum of $136,968 in December 2007 which had been included in the drawdown notice for Claim 15 submitted on or about 20 December 2007.

MFS contends that, under the terms of the Loan Agreement, it was not required to make the advances claimed by the Plaintiffs by Counterclaim for several reasons.

II Misleading or deceptive conduct

The Plaintiffs by Counterclaim allege that between 21 January 2008 and 11 February 2008, MFS misled them into believing that all funds due under the Facility would be provided within the timeframes provided for in the Loan Agreement.

The Plaintiffs by Counterclaim contend that the result of the alleged conduct was that:

(a)the Borrowers were unable to refinance the Facility in sufficient time to repay Perpetual by 15 August 2008;
(b)the Borrowers would have continued to negotiate with First REIT to sell hotel suites; and
(c)the Borrowers would have negotiated with the Builder in respect of unpaid claims for work done and avoided the Builder ceasing work on the Forest Resort Development.

MFS contends that to the extent that the January 2008 representations were to the effect alleged, the Plaintiffs by Counterclaim did not in fact rely upon them because, amongst other things, they were aware of, and believed, the contemporaneous and widely publicised adverse reports in the media of the MFS group of companies’ serious financial troubles.

III Alleged penalty

The Plaintiffs by Counterclaim also allege that the higher interest rate of 16% (charged upon the Borrowers’ account when it was in default) is a penalty, and that accordingly, both the Loan Agreement and the Guarantee and Indemnity are unenforceable.

MFS and Perpetual contend that the higher interest rate of 16% is not a penalty as it represents the parties genuine pre-estimate of loss (as at the date of entry into the Loan Agreement) because it is in line with prevailing interest rates at the time given:

(a)the type of Borrowers (including an assessment of their risk and credit worthiness);
(b)the type of Lender; and
(c)the type of development being funded (including an assessment of the risks associated with the venture and the anticipated levels of revenue).

D. Summary of Issues and Conclusions

Subject to establishing the precise amount owing, Perpetual has established its claim.

The Plaintiffs by Counterclaim have failed to establish any claim and no question of reduction or set off in relation to the claim made by Perpetual arises. The Guarantors are accordingly liable in an amount to be determined.

In determining the result set out above the following issues (all relating to the counterclaim) were considered:

(a)Failure to allow drawdown          -          Claim 12 ($59,188).
(b)Failure to allow drawdown          -          Claim 15 ($136,968).
(c)Failure to allow drawdown          -          Claim 16.
This claim required the resolution of a number of issues which impacted upon the obligation on the part of MFS to make the funds available.
(d)Failure to allow drawdown          -          Claim 19.
(e)The effect of the failure to allow drawdowns, namely, causation.
(f)Whether MFS engaged in misleading or deceptive conduct by representing that it was business as usual and that all funds would be provided in accordance with the relevant time frames.
(g)Whether interest at the higher rate of 16% was a penalty and if so the consequences so far as the Guarantors are concerned.

Although I have endeavoured to deal with each issue in some detail, partly in deference to the submissions of the parties and partly because I am probably required to do so, the matter could well have been disposed of on the issue of causation. To my mind it is clear that whatever was said or done, as alleged, it did not have the dramatic causative effect contended for by the Plaintiffs by Counterclaim. The evidence does not establish any logical direct and necessary connection between the alleged breaches (and representations) and the alleged loss. Further and in any event, no breach has been established. In each of Claims 12, 15, 16 and 19, for the reasons given, there was no obligation on the part of MFS to permit any drawdown. Finally, there is no merit in either the misleading or deceptive conduct claim or the penalty claim.

Although I was tempted to start with, and perhaps end with causation because it is, as pointed out, a major issue dispositive of the entire case (whether or not breach is established), I have decided to first deal with the alleged breaches by MFS. Causation commences at paragraph 236.

E. Failure to make available drawdowns
I Introduction

MFS denies any such breach and raises a number of matters, particularly in relation to claim 16.

First, the relevant requests for payment did not satisfy the requirements imposed by the Loan Agreement in that the Borrowers did not submit Drawdown Notices in respect of them (clause 4.3(a)(iv) of the Loan Agreement).[6]
[6]This relates mainly to Claim 16.

Second, at the time of the Borrowers’ request for payment[7], the Borrowers had committed multiple and unremedied Events of Default (commencing by at least 31 October 2006) under the Loan Agreement, in that they:

(a)had not remitted GST input refunds to MFS within 7 days of receiving them from the ATO (clauses 4.3(a)(i) and /or (v)); and/or

(b)had deliberately committed breaches of trust by applying the GST refunds for their own benefit (clause 4.3(d)).

[7]This relates to Claims 16 and 19.

In response to the GST allegations, the Plaintiffs by Counterclaim allege that there was an agreement (or representation to such effect) made on 17 March 2008 between MFS and the Borrowers to the effect that the Borrowers could continue to retain GST refunds to fund shortfalls in funding for furniture, fixtures and equipment and builder variations and to cover shortfalls in other payments that were to have been made by the Lender. MFS contends there was no such agreement or representation and that even if there was such an agreement or representation, neither event would be effective in varying the Borrowers obligations under the Loan Agreement because they were not in writing signed by the parties as required by clause 17 of the Loan Agreement. Further, MFS contends that the Borrowers cannot rely upon any conduct as constituting a waiver because of the provisions of clauses 8.1, 9.4 and 10 of the Loan Agreement.

Further, and critically, MFS contends that even if there was such an agreement or representation on the alleged terms, they would not, it was submitted, operate to negate the conclusion that as at the dates on which the further funds requested by the Borrowers would otherwise have been due (i.e. January and February 2008, which predated the alleged agreement or representation), the Borrowers were in default. While there was an existing Potential Event of Default or an Event of Default, there was, it was contended, no obligation on the Lender to make an advance.

Third, since 15 March 2008, the Borrowers committed, and failed to remedy, an Event of Default under the Loan Agreement because they failed to achieve satisfactory pre-sales of $25,800,000.00 (only $19,283,987.00 of sales of hotel suites was achieved).

Fourth, since about January 2008, the Borrowers had committed a Potential Event of Default because by that date, and with the passing of time, it was clear that the Borrowers were unable to meet the specified debt reductions.

In respect of the allegation that in breach of the Loan Agreement, MFS failed to pay $59,188.00 in October 2007, MFS contends it was not required to make that payment because:

(a)the payment was in respect of a variation to be paid out of a contingency allocation;
(b)in the circumstances identified in (a) above, unless MFS agreed to accept it, the amount was not entitled to be paid out of the Facility (clause 12.8 of the Letter of Offer and clause 4.3(a)(viii)(C) of the Loan Agreement);
(c)it was not the subject of a Drawdown Notice (see clause 4.3(a)(iv) of the Loan Agreement);
(d)at the time, the Borrowers had committed multiple and unremedied Events of Default (commencing by at least 31 October 2006) under the Loan Agreement (see paragraph 21 above); and
(e)having been deleted from the funds approved in Claim 12 (i.e. October 2007), that sum was not thereafter made the subject of a claim.

Similar arguments are made by MFS in relation to the sum of $136,968, the subject of Claim 15.

II Failure to allow drawdown – Claim 12 ($59,188)

The amount of $59,188 was not included in the drawdown notice in respect of Claim 12. It was, however, included in the WT Partnership Value to Complete Report No 12 dated 27 September 2007.

MFS submits that it was not obliged to pay the amount as it was never included in any drawdown notice. Further, it submits that the claim was for payment of a variation and accordingly it had an absolute discretion as to whether to make such payment. It refers to clause 12.8 of the Letter of Offer and clause 4.3(a)(vii)(c) of the Loan Agreement.

The Plaintiffs by Counterclaim submit that the claim was removed by Ms Bennett of MFS from the Annexure A drawdown notice and that any discretion had to be exercised favourably in circumstances where it was approved by WT Partnership, the agreed Quantity Surveyor (“QS”).

The Plaintiffs by Counterclaim contend that the construction contended for by MFS, in which WT Partnership could approve a variation only to have MFS not allow it, or where the drawdown may vary from the QS Certificate, would be both uncertain and could give rise to significant levels of unfunded liabilities as well as the anomalous result that the Builder could perform variations that had been approved by the QS, and would ordinarily become entitled to payment under the building contract, only to have MFS refuse to fund the work leaving the Borrower in default under the building contract and requiring MFS to rectify the default under the Tripartite Deed[8] should it wish to avoid industrial action by the Builder.
[8]The Tripartite Deed was a deed entered into between MFS, the Builder and the Borrower.

Moreover, they contend that on MFS’s construction the Borrower and Builder would have no way of knowing whether or not a claim had been “allowed” other than by drawing an inference from the fact of payment or non-payment by the Lender. On such a construction the Lender could never be in default under the Loan Agreement for not advancing funds and its consideration for the agreement would arguably be illusory.[9]
[9]Reference was made to Gippsreal Ltd v Registrar of Titles and Kurek Investments Pty Ltd (2007) 20 VR 157; Makeig v Batterham [2009] NSWSC 344.

Finally, the Plaintiffs by Counterclaim contend that even where the literal terms of clause 4.3(a), when read in isolation, may accord with MFS’s interpretation, the clause must be read in the context of the construction contract as a whole, which, as a commercial contract, should be construed in order to avoid the irrational or unintended results that may follow, as indentified above.[10]
[10]Reference was made to Management 3 Group Pty Ltd (in liq) v Lenny's Commercial Kitchens Pty Ltd (No 2) [2011] FCA 663, [163]; MLW Technology Pty Ltd v May [2005] VSCA 29, Gillard AJA (Winneke P and Buchanan JA agreeing), [76].

It is unnecessary to decide whether MFS did have a discretion or whether, in the event that it did have a discretion, the discretion was properly exercised because the amount was in any event paid as part of drawdown number 17. To the extent that it was and remained unpaid this was, as I will endeavour to demonstrate, of no legal consequence. In my opinion, and so far as may be relevant, MFS did have a discretion in relation to the payment of amounts out of the Contingency Fund. This is what the parties negotiated and specifically agreed. Further, there is no evidence to support a conclusion that such discretion was not exercised properly and if I am wrong about this it is clear in any event that no loss was suffered as a consequence.

III Failure to allow drawdown – Claim 15 ($136,968)

The Borrowers’ claim for payment of the sum $136,968 ($50,968 to the Builder and $86,000 to the Borrowers) was for variations.

The Borrowers requested the Lender to fund that amount under the Contingency Drawdown Limit.

MFS submits that it was not required to pay the sum of $136,968 ($50,968 to the Builder and $86,000 to the Borrowers) in December 2007, which had been included in the drawdown notice for Claim 15 submitted on about 20 December 2007. Reference was made to clause 12.8 of the Letter of Offer (which is incorporated by reference into the Loan Agreement (clause 2)) and clause 4.3(a)(viii)(C) of the Loan Agreement which provides that:

(a)if the Borrowers want to drawdown on the Contingency Drawdown Limit, they must provide the Lender with “comprehensive detail (supported by documentary evidence if required by the Lender) of the reason” for it; and
(b)drawdowns on the Contingency Drawdown Limit may be permitted at the “sole and absolute discretion” of the Lender.[11]

[11]Emphasis in (a) and (b) added.

Finally it was contended by MFS that the amount was paid when it was satisfied with the information provided.

The Plaintiffs by Counterclaim do not dispute that MFS had a right to seek information regarding claims. However, they contend that the issue is whether, having received comprehensive details and documentary evidence of the claims and those claims having been approved by the QS, MFS remained entitled to refuse to make this drawdown pending the receipt of further information to its satisfaction. They submit that comprehensive information having been provided and the QS having approved the claim on behalf of MFS, MFS was not entitled to refuse to make the drawdown set out in the drawdown notice.

The Plaintiffs by Counterclaim contend further that the information sought, including confirmation that “the works claimed appeared reasonable” and some minor additional comments, was received by Bennett of MFS by 8 January 2008. At this time either the variation which Bennett had said was dependent only on receiving this information became payable or Bennett had an obligation to communicate that the claim had been disallowed to the borrower. MFS did neither.

Finally, it was submitted that this late payment was in breach of both the obligation to communicate the allowance or disallowance of claims and to pay those claims when approved.

Mr Walsh accepted that clause 12.8 of the Letter of Offer governed the question of the use of the contingency provision. He also accepted that (as early as September 2007) he was being told by MFS what its position was, namely that the Borrowers were not entitled to use the contingency provision for variations as a matter of right, but they may be permitted to use them as a matter of discretion.

Walsh accepted that on 19 December 2007, Bennett told Mr Lyons (from WT Partnership) and Walsh that she required more information about those items and proposed to deduct those items from the claim until further information had been provided and reviewed.

WT Partnership responded to Bennett’s request for information on 7 January 2008 and provided further information. Walsh accepted that he was aware of the email from WT Partnership and that they were providing further information in response to his own request of them to do so.

There is no evidence to suggest that Bennett was anything other than genuine in her request for more information. I do not accept that she already had all the information she needed. This is apparent from a consideration of the response from WT Partnership on 7 January 2008 and Walsh’s own attempt to get WT Partnership to provide further information.

Whilst the two amounts in Claim 15 were declined at first because insufficient supporting information had been given, they were included and paid at the same time as Claim 16, when sufficient information was supplied.

Further, and in any event, by 4 March 2008, within the time specified under the Tripartite Deed, the total of Claim 16 was paid (including the $136,968) and there was deemed to be no breach of the Building Contract in respect of it. Finally, as I will endeavour to demonstrate, I do not accept that failure to pay this amount had any relevant legal consequence.

F. Failure to allow drawdown – Claim 16

Claim 16 is the essence of the claim by the Plaintiffs by Counterclaim.

I Drawdown notice

MFS submits that the evidence fails to establish that the Borrowers submitted, at any time, a drawdown notice which was in the form of Annexure A to the Loan Agreement in respect of Claim 16 (i.e. the amount the subject of the WT Partnership Value to Complete Report No 16 dated 23 January 2008).

The Plaintiffs by Counterclaim submit that the uncontradicted evidence of Walsh and Ms Ebbels was to the effect that the relevant Annexure A Drawdown Notice for this claim was faxed by Walsh to Bennett on or about 25 January 2008. Further they submit that on a proper construction of the Loan Agreement, notice in a form other than Annexure A was sufficient. Finally, they submit that the claim was in any event considered and finally paid by MFS.

In the circumstances and for the reasons referred to below I am not satisfied that a drawdown notice in the form of Annexure A to the Loan Agreement was sent to MFS.

The document relied upon by the Plaintiffs by Counterclaim is a schedule to the WT Partnership Value to Complete Report No 16 dated 23 January 2008. Ebbels conceded that such a document was different from the drawdown notice required by the Loan Agreement. The Plaintiffs by Counterclaim did not seek to rely upon any other document in either their written Outline of Opening or in the oral opening of their case by their Senior Counsel.

However, on the third day of his evidence (and the sixth day of the trial) Walsh said for the first time that the requisite drawdown notice had been prepared by the Borrowers and submitted by him by fax to the Lender in January 2008. This was despite the fact that:

(a)MFS denied the existence of the drawdown notice in the first Defence to Counterclaim filed;
(b)MFS explicitly pleaded in the proposed Amended Defence to Counterclaim served on 1 August 2012 that the Borrowers did not submit a drawdown notice in respect of Claim 16 (i.e. the December Claim) and that as a result it was not required to advance the amounts sought in respect of Claim 16;[12]
(c)MFS’s written Outline of Opening served on 7 September 2012 explicitly contended that the Borrowers did not submit a drawdown notice in respect of Claim 16 and that as a result MFS was not required to advance the amounts sought in respect of Claim 16;[13]
(d)Senior Counsel for MFS opened its case by stating (as its first basis of defence) in emphatic terms that the Borrowers did not submit a drawdown notice in respect of Claim 16 and that as a result MFS was not required to advance the amounts sought in respect of Claim 16;
(e)Walsh was present in Court throughout Senior Counsel’s opening of MFS’s case; and
(f)Walsh’s oral evidence commenced after Senior Counsel for MFS had opened its case and the Plaintiffs by Counterclaim sought and obtained leave to adduce, and did adduce, additional oral evidence in chief from Walsh (which additional evidence did not refer to the Borrowers having submitted a drawdown notice on about 25 January 2008).

[12]Paragraphs 34(f)–(o) of the Amended Defence to Counterclaim.

[13]Paragraphs 19 and 20 of Outline of Opening of the Second Defendant to Counterclaim dated 7 September 2012.

None of the parties to the proceeding discovered any drawdown notice in respect of Claim 16. Drawdown notices in respect of all other claims (except for an early drawdown notice for $243,275 on 20 December 2006 and a drawdown notice for Claim 17, i.e. for work done in February 2008), were discovered and are in the Court Book. Further searches to find the alleged drawdown notice for Claim 16 were made by the current controller of the Borrowers and by MFS, after Walsh gave the evidence referred to. Those searches confirmed that no such document was located in the documents in those parties’ possession.[14]
[14]Affidavit of Ms Greaves sworn 3 October 2012; and affidavit of Mr Ritchie sworn 2 October 2012.

I do not accept Walsh’s evidence on this matter. It is more likely than not that no such notice was faxed by Walsh as alleged. Not only was the existence of such a drawdown notice not particularised in the Counterclaim as referred to above, Walsh’s witness statement does not refer to the document or that version of events. In fact, in his witness statement there are multiple references to the drawdown notice for Claim 15 and to the fact of it being submitted to the Lender (see paragraphs 80, 81, 82, 83, 84, 85, 87 and 88), compared to two bald references in paragraphs 136 and 137 to a drawdown notice for Claim 16.

Walsh’s claim, that before the trial commenced he did not realise that MFS was defending the Counterclaim on the basis that no drawdown notice in respect of Claim 16 had been submitted to it, even if true (which I do not accept), does not provide a satisfactory explanation for why he did not give evidence about the alleged faxing of the drawdown notice in his oral evidence in chief. As identified above, Walsh was present in court throughout the opening made by Senior Counsel for MFS. He commenced giving evidence on day five of the trial and Mr Morrison QC made his opening address on day four of the trial.

Walsh claims that he faxed the drawdown notice. However, all other drawdown notices, except for an early one in November 2006, that were submitted to the Lender were sent by email.[15] His explanation for why he faxed it (as opposed to sending it by email) was that his daughter Ebbels, who generally prepared the drawdown notices “was not on site at the time”. He also claimed that he was not familiar with scanning-in documents, unlike Ebbels. Implicit in this claim is the further claim that Walsh faxed the document from the site office. Walsh stated that he faxed the drawdown notice “on or around about 25 January [2008]”. Walsh received the WT Partnership Value to Complete Report No 16 dated 23 January 2008 at 5:42pm on 25 January 2008.[16]
[15]Walsh did not disagree with the proposition that the bulk of the drawdown notices were emailed to the Lender.
[16]There is no evidence to support receipt at any earlier time.

The evidence supports a finding that if Walsh had submitted a drawdown notice to the Lender in relation to Claim 16, he would have done so soon after he received the certification from the QS (i.e. the WT Partnership Value to Complete Report No 16 dated 23 January 2008). Given that 25 January 2008 was the Friday before the Australia Day long weekend, I find that Walsh would have done so on 25 January 2008. On that day Ebbels was present in the site office at the time Walsh received the certification from the QS and remained in the office until about 6:54pm. She could have scanned-in the document that evening. Further, Mrs Walsh was present in the office in the afternoon on 25 January 2008, possibly that evening as well, and would have scanned-in any documents if Walsh had asked her to do so.[17] Consequently, Walsh’s stated reason for faxing the document cannot be sustained and I do not accept it.
[17]Documents show that Mrs Walsh was scanning documents to Walsh throughout the day on 25 January 2008.

In addition, Walsh claimed that he faxed the drawdown notice to Bennett at Southport in Queensland. Bennett’s fax number at that time was 07 5557 8603. That was also the number to which a drawdown notice was faxed on 3 November 2006.[18]
[18]Subpoena issued to Telstra (i.e. Exhibit P4 – Annexure A).

Ebbels gave evidence that the fax machine used for outgoing faxes was located in the office on site from which Walsh, Tanya Farrell and Ebbels herself worked, and that that fax machine used the number 03 5345 2087. Accordingly, the evidence shows that a drawdown notice for Claim 16 was not faxed by Walsh as he claimed. The subpoena issued to Telstra[19] established that in the period 21 January 2008 to 12 February 2008 no faxes were sent to MFS (and/or Bennett) on the fax line 03 5345 2087.
[19]That is, Exhibit P4 – Annexure B.

In light of this evidence, Mrs Walsh was recalled and gave further evidence that there was another fax machine located in her home, and that it used the fax line for the Forest Resort (i.e. 03 5345 2087). I am not persuaded by this evidence.

Walsh was not recalled to give evidence as to the fax number/line of the alleged fax machine located in the office on which he claimed to have faxed the drawdown notice to Bennett. He was present in court throughout the trial.

The Plaintiffs by Counterclaim contend that MFS cannot rely upon the Borrowers’ failure to submit a drawdown notice in respect of the December Claim because it did not rely upon such a failure at the time. I reject the submission. A party to a contract is entitled to justify its actions (including any failure to perform) on any ground that was available at the relevant time, even if it was not aware of those grounds and/or it did not actually rely upon them at that time.[20] However that is not necessarily the end of the matter.
[20]Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359, 377–378 per Dixon J; Hodgson v Amcor [2012] VSC 94, [1595]–[1609] per Vickery J; ACN 096 278 483 Pty Ltd v Vercorp Pty Ltd [2011] QCA 189, [65].

Although no drawdown notice was given, as I have found, in accordance with clause 4.3(a)(iv) of the Loan Agreement it does not necessarily follow that MFS did not come under any obligation to allow the Borrowers to make a drawdown in respect of the amounts sought in respect of the December Claim. Various other matters have been raised to suggest that there was such an obligation and the fact is that in any event MFS entertained, considered and paid the claim.

At no time did MFS ever raise with the Borrowers that they had not received the Annexure A drawdown notice in January 2008 either properly completed or at all.

That the claim in the (incorrect) form submitted was considered by MFS is evident from Bennett’s acknowledgement in her email to Michael Bailey of the Royal Bank of Scotland (“RBS”) on 14 February 2008 that the claim “is now overdue for payment”. Bennett told the RBS that she believed the notice had been received and would look into it. Having presumably done so, there is no evidence of Bennett having raised this as an issue. In fact, prior to this proceeding, there is no evidence that MFS ever raised this as an issue.

Further, in both her email communications with RBS and Walsh, Bennett referred to “the current claim”, thereby in substance admitting the receipt of a claim. She told RBS on 14 February 2008:

“The current claim is for a total of $2,024,084 and is now overdue for payment...”

She told Walsh on the same day:
“It is still the expectation that the balance of the current claim will be available by the end of the month...”.

It is common ground that the claim was in fact paid in March 2008.

Accordingly, I find that a notice was provided to MFS in some other form. The remaining question is whether this was sufficient.

MFS submitted that ”the obligation to allow a draw down (in clause 4.3(a)) is an obligation to allow a draw down on a ’Drawdown Date‘ being the date which the borrower nominates in a Drawdown Notice as the date on which it intends to draw funds. Drawdown Notice is defined as a notice in the form of Annexure A.” It follows, according to MFS, that if notice is given in a form other than Annexure A, there is no substantive obligation to make a draw down.

Regardless of the existence or otherwise of a Notice in the form of Annexure A for Claim 16, such a narrow construction of clause 4.3(a) and such a strict interpretation of the requirements of a drawdown notice under the Loan Agreement would, it was submitted by the Plaintiffs by Counterclaim, lead to absurd and commercially unsafe results and would be contrary to well established principles of construction including that the court should construe commercial documents fairly and broadly, without being too astute or subtle in finding defects.

One such absurd result suggested by the Plaintiffs by Counterclaim was in fact raised by MFS in its opening, namely that on the Defendants’ construction, submission by the Borrower of a drawdown notice in some other form would — despite all parties having a clear and unambiguous commercial view of what was required — have the legal effect that the Borrower was obliged to pay the claim under the building contract, but MFS was under no obligation to pay the Borrower under the Loan Agreement.

The proper approach to construction, in a case where a notice was found to be defective in form was described by the Court of Appeal in MLW Technology Pty Ltd v May.[21] Applying this approach, any notice to the Lender in substantially the form of Annexure A that contained the essential features of an Annexure A drawdown notice and which was clear and unambiguous would be sufficient to enliven MFS’s obligation to advance funds in accordance with and subject to the terms of the Loan Agreement.
[21][2005] VSCA 29, [76]–[93].

Accordingly I find as follows:

(a)No drawdown notice in the form of Annexure A to the Loan Agreement was faxed to MFS.
(b)Notice of the claim was in any event given and received by MFS.
(c)The claim was eventually paid in full rendering the matter rather academic in the circumstances.
(d)To the extent that payment was late it did not as I will endeavour to explain have any causative effect.
(e)The consideration and ultimate late payment of the claim does not disentitle MFS from raising other issues associated with its obligation to pay.

II GST refunds

MFS alleges that it was, in any event and notwithstanding late payment, under no obligation to make advances in January, February or May 2008 because there had been events of default by the Borrower under the Loan Agreement and in any event the making of further advances was in the sole discretion of the Lender.

One of the alleged events of default (or potential event of default) relates to the failure by the Borrowers to remit input tax credits to the Lender for the GST component of drawdowns that it had obtained.

Relevantly, clause 4.3(c) of the Loan Agreement relates to GST and is in the following terms:

“The Borrower must lodge a business activity statement at monthly intervals with the Australian Taxation Office in order to claim GST input tax credits on costs incurred for the development of the Security Property.
…
The Borrower will, unless otherwise agreed in writing by the Lender, forthwith pay the amount of any input tax credit refund that it obtains in relation to costs which are incurred for the development of the Security Property to the Lender (each payment of an input tax credit refund that is made by the Borrower to the Lender is a “Refund”) within 7 days of receipt in partial repayment of the Debt.
The Borrower holds on trust for the lender, its right to obtain the GST refund and all monies payable by the ATO to the Borrower with respect to the GST refund. This is an essential term of the Agreement, breach of which constitutes an Event of Default under this Agreement.
Provided that the Borrower complies with the provisions in clause 4.3(c) the Lender may, as its absolute discretion, allow Construction Drawdowns, Contingency Drawdowns, and Ancillary Drawdowns to be drawn inclusive of GST.”

The Borrowers contend that until December 2007, all GST refunds received by the Borrowers were used in reduction of the debt. However, as a consequence of problems with respect to drawing down for variations and the inability to pay the Builder with respect to such variations after December 2007, the Borrowers applied the GST refunds to the variations – which they contend the Lender had failed to pay.

Senior counsel for the Borrowers submitted that an oral agreement was entered into between the Borrowers and the Lender in about March 2008 where the Lender agreed that the Borrowers could retain the GST refunds and apply the refunds to the variations.

In the alternative, the Borrowers allege that the Lender represented in about March 2008 that the Borrowers could continue to retain GST refunds to fund shortfalls in funding for furniture, fixtures and equipment and builder variations and to cover shortfalls in other payments that were to have been made by the Lender (“GST Representation”).

The Borrowers also contend that, because of the oral agreement and the GST representation, the Lender waived clause 4.3(c) of the Loan Agreement, elected to affirm the Loan Agreement and acquiesed in the alleged breach of clause 4.3(c). The Borrowers contended that the Lender cannot now rely on the Borrowers’ breaches in retaining the GST refunds.

It is further contended by the Borrowers that if there was a breach of the Loan Agreement (which they deny), the failure to remit GST to MFS was caused by prior and ongoing breaches of the obligation to advance funds against certified drawdowns by the Lender. Further, the Borrowers contend that even if the remittance of GST was a precondition to providing advances under the Loan Agreement, they did all that they could to achieve those things and in the absence of an agreement to retain the GST, the real cause of the failure to remit the GST was the Lender’s breaches in failing to make the funds available. Further, the Borrowers submit that if remittance of GST was a precondition, equity will take it as being either satisfied or excuse non performance by reason of the Lender’s own actions in contributing to the default.

Senior Counsel for MFS submitted that even if an agreement regarding the retention of GST was entered into, it came at a much later date, namely March 2008, when the retention of GST had occurred from December 2007.

MFS further contends that pursuant to clause 4.3(c) of the Loan Agreement, the Borrowers were in breach of trust by retaining the GST and that only fully informed consent by MFS would discharge the defaulting trustee.

The evidence

On 22 November 2007, the Borrowers received a GST refund of $277,149 from the Australian Taxation Office (“ATO”).[22]
[22]Exhibit P3, Ebbels’ Witness Statement, Schedule A.

Walsh gave evidence that he decided to withhold GST around 22 November 2007. He admitted withholding the GST for the succeeding months. His evidence was that he decided to withhold GST until he could achieve a satisfactory solution to the disagreement between MFS and the Borrowers about whether the variations would be funded out of the contingency provision of the Loan Agreement. Walsh admitted that he alone made the decision and that he did not read the Loan Agreement regarding the Borrowers’ obligations nor did he receive any advice on the issue. Walsh also gave evidence that at this time, he was looking to set off variation payments with the GST but that no agreement had been reached with MFS.

On or about 1 October 2007, Bennett of MFS sent an email to Walsh (copied to Ebbels, Bush and Ahearn) stating that the Borrowers could not fund variations out of the contingency provisions of the Loan Agreement and that the Forest Resort would have to fund the cost of those variations. During cross examination, Walsh gave evidence that he had funds available to pay the variations, but chose not to use them.

Walsh also gave evidence that he told Ebbels and Mrs Walsh that GST was to be withheld until further notice but could not recall if he told them why it was being withheld.

Mrs Walsh gave evidence that she accepted the instructions given by her husband not to remit the GST to MFS however she could not recall the conversation with Walsh when those instructions were given. Similarly, Ebbels gave evidence that she did not recall the circumstances in which she was told that GST payments were to be retained.

On 20 December 2007, Bennett of MFS sent an email to Ms Farrell of the Forest Resort (copied to Mrs Walsh and Ebbels) stating that MFS had not received a GST payment since October and requested advice as to when the next payment of GST was likely to be received. Mrs Walsh responded the next day stating that the last GST refund was paid on 22 November 2007 for $266,217.

On 25 January 2008 the Borrowers received a GST refund of $403,007 from the ATO. The refund was not remitted to MFS within seven days of receipt or at all.[23]
[23]Exhibit P3, Ebbels’ Witness Statement, Schedule A.

Walsh gave evidence that Bennett emailed him on 16 March 2008 stating that MFS had not received a GST refund since 22 November 2007, reminding Walsh of his obligations under the loan agreement to remit GST to MFS and reserving MFS’s rights in this regard.

Walsh also gave evidence that on 17 March 2008, a telephone meeting took place attended by himself, Ebbels, Bush and Snowden and Bennett of MFS during which a number of issues were discussed. Walsh gave evidence that at that meeting he asked Bennett and Snowden whether MFS was prepared to allow the Borrowers to retain GST refunds to fund shortfalls in fixtures, fittings and equipment and builder variations. It was Walsh’s evidence that Bennett agreed to this course at that meeting.

It was put to Ebbels during cross examination that there was in fact no agreement entered into during the telephone conference in relation to the retention of the GST. Ebbels denied this proposition.

Bush, who was also in attendance at the meeting, gave evidence that at that meeting Walsh stated that he had retained the GST and applied the moneys to the acquisition of fixtures and fittings to ensure that the hotel opened on 21 March and that they sought further details in respect of MFS accepting what had occurred in regard to the GST. Bush could not recall what the MFS representatives had said in response to the explanation regarding the retention of GST.

Walsh gave evidence that he sent an email to Bennett that evening confirming that the GST would continue to be retained by the Forest Resort. The email took the form of a list with bullet points under the heading “Items discussed today.”

Snowden of MFS replied later that evening stating “thanks for the chat very worthwhile” and that he would get back to him (Mr Walsh) to confirm that MFS had sufficient funds to pay the builder. Snowden did not mention the GST issue in his email. It was put to Walsh during cross examination that Snowden described the meeting as a ”chat” and that he did not indicate that any agreement had been reached. Walsh denied that this was the case.

A further email was sent by Snowden to Walsh the next morning (at 1.18am) stating that MFS would consider and respond to all items at their earliest opportunity. During cross examination, Walsh accepted that by ”all items” Mr Snowden was referring to the seven items outlined in his earlier email under the heading “Items discussed today” and that this included the GST issue.

On 20 March 2008, MFS remitted the funds that were outstanding to the Builder and consequently all payments to the Builder were up to date.

On 29 March 2008, Snowden sent an email to Walsh and Bennett asking to see Bennett to discuss ”an event of default under the Forest Resort Loan Agreement with respect to non refund of GST”. There is no evidence of Walsh or anyone at the Forest Resort responding to this email.

On 10 April 2008, Octaviar Limited (the Responsible Entity at the time) issued default notices, including a Notice of Termination and Demand to the Forest Resort in respect of the Loan.

During cross examination, Bush was taken to a number of emails after March 2008 that he had sent which related to the GST issue. In particular, Bush was taken to an email that he had sent to Walsh and Amundsen of Mirvac on 11 April 2008, where he stated that he had spoken to Bennett regarding GST and that he advised her that due to MFS’s position, the Forest Resort was left with no choice but to use the GST monies to ensure that the Hotel was completed on time. Bush stated in the email that ”she appeared to accept this”.

Additionally, in another email to Walsh and Ebbels on 17 April 2008, Bush sought their comments on a draft email to be sent to Bennett in response to her request for information in regard to various issues. Under “GST refund", Bush stated that:

“We acknowledge that the GST monies were retained and advise that a management decision to hold same at the time had to be taken to ensure that the Hotel was completed and opened on 22 March 2008 as this was in the best interest of all parties, as a failure to open would have damaged the Hotels brand in the market.”

Bush gave evidence that the emails demonstrated his understanding of the position at the time.

Walsh gave evidence that he had not suggested any amendments to the draft email and relied on Mr Bush as he was having discussions with Bennett at the time.

This email was subsequently sent to Bennett with a minor amendment to the amount of GST that had been withheld.

On 15 April 2008, Walsh and Bush attended a meeting at MFS’s offices in Queensland with Bennett to discuss the notices of default that had been issued. Bush took notes before and after the meeting and his evidence was that the GST issue was a point of discussion because it was one of the issues raised as being a default under the Loan Agreement. Bush could not recall what was said at the meeting regarding the GST issue however his handwritten notes contain a section entitled “actions” and included “mitigants to default issues”. Bush gave evidence that he was required to prepare a pros and cons list of the Borrowers’ breaches.

On 18 April 2008, Walsh sent a letter to Task of Octaviar stating:

“We also wish to comment on the retention of the GST payments during this period. As a result of the difficulties being experienced by MFS and uncertainty as to its ability to continue to make payments to the builder and other contractors associated with the Project we were left with no other option but to use these monies to ensure that the Hotel opened on time which occurred within seven days of the builder’s hand over. Prior to Christmas, we had approached several equipment finance houses to raise appropriate facilities to cover the cost of all of the furniture, fittings and equipment (FF&E) required within the Hotel. We also approached MFS for assistance with a portion of same being items not normally covered by equipment financers. All parties that were approached quickly withdrew their support once the MFS difficulties were made public and indicated their reluctance to accept a second mortgage security position over the properties behind MFS This was viewed by these institutions as an unacceptable security risk in the event MFS was to falter as a principle Lender.

At this stage the only option to avoid a distressed operational status was to redirect the retained GST funds to secure deposits for FF&E...”

Further, MFS has discovered a handwritten note on an email from Louise Caton of Octaviar Limited to recipients including Bennett on 29 April 2008 which states ‘GST – Leave with Forest Resort!’. This document was not put to any witness.

Analysis
Was there an actual or potential event of default under the Loan Agreement?

Pursuant to clause 4.3(c) of the Loan Agreement, the Borrowers were required to remit GST to MFS within seven days of receipt. This clause is stated to be an essential term, breach of which constitutes an event of default under the Loan Agreement.

Walsh admitted that he decided around the end of November 2007 to withhold GST from MFS. As such, it follows that to the extent that Walsh did not remit GST within seven days of receipt, there was a potential event of default. Walsh’s failure to pay the GST to MFS then matured into an actual event of default under clause 4.3(c).

Clause 4.3(c) also provides that the Borrowers hold on trust for MFS, its right to obtain the GST refund and all monies payable by the ATO to the Borrowers with respect to the GST refund. Walsh’s decision and action in withholding the GST consequently also constituted a breach of trust particularly because the decision was made on the basis of the Borrowers’ interests and to use the money as a bargaining measure, rather than for the benefit of the beneficiary, MFS.

Clause 8.1 of the Loan Agreement deals with the rights of the parties in regard to an event of default and is in the following terms:

“At any time after default, the Lender may in the manner and at the time that the Lender in its absolute discretion deems appropriate but without any obligation to do so and notwithstanding any omission neglect delay or waiver of the right to exercise such option and without liability for loss:-

(a)Cancel this Facility;
(b)Require payment of the Debt and recover same from the Borrower and/or any Guarantor;
(c)Exercise any powers, rights or privileges conferred by law, this Agreement, the Security and/or any other collateral document or securities; and/or
(d)Perform any one or more of the Borrower’s obligations under this Agreement.”

Evidently, it was open to MFS to cancel the Facility, require payment of the debt or exercise any rights under the law or the agreement after 22 November 2007 when the event of default in relation to the GST occurred. This included the right not to advance further funds (clause 4.3(a)(i) of the Loan Agreement).

The Borrowers response to the Event of Default and breach of trust

In response to the allegation of an Event of Default and breach of trust, the Plaintiffs by Counterclaim allege four matters:

(a) The Borrowers and MFS entered into an agreement on 17 March 2008 whereby MFS agreed that the Borrowers could retain GST funds for the purpose of funding Furniture, Fixtures and Equipment (“FF & E”);

(b) MFS waived, elected not to pursue the event of default, or acquiesced in the breach;

(c) MFS was in default of its obligations under the Loan Agreement; and

(d) MFS, as the beneficiary accepted the breach of trust by the Borrowers as trustee of the GST payments.

(a)Was there an agreement?

The evidence does not establish that any agreement was reached between the Borrowers and MFS during the March 2008 telephone meeting with respect to the retention of GST. The email sent by Walsh after the meeting does not indicate that any agreement was reached, but rather appears to be an action items list which simply outlines the issues that were discussed at the meeting. While Ebbels confirmed that an agreement was reached regarding GST, I do not accept that there is sufficient evidence to conclude that an oral agreement was entered into. The documentary evidence after the meeting, as set out and referred to below, suggests that no such agreement was reached.

Further, I do not accept Bush’s evidence of the meeting. He could not recall the substance of what the MFS representatives had said in regard to the GST issue which is critical to whether an agreement of the nature alleged by the Borrowers existed. Consequently, I find that as at 17 March 2008 there was no agreement between the parties regarding retention of GST by the Borrowers.

The correspondence between MFS and representatives of the Forest Resort, including Bush after the teleconference confirms that no agreement regarding the retention of GST was reached at the March 2008 meeting.

In particular, the emails from Snowden to Walsh on the evening of 17 March 2008 thanking Mr Walsh for “the chat” and the email on 18 March 2008 stating that MFS would consider the seven items that were discussed at the meeting and get back to him suggest that, while the matters including the GST issue had been discussed at the meeting, no agreement had actually been reached.

In addition, it is inconceivable that upon receiving the email on 29 March 2008 where Snowden suggested that an event of default had occurred in relation to the GST Walsh or someone at the Forest Resort did not respond alleging that there had not been a default on the basis of the agreement that had been reached less than two weeks earlier.

Moreover, the emails from Bush to Mirvac on 11 April 2008, the draft email to Walsh and Ebbels seeking comments in relation to the request for further information from MFS on 17 April 2008 and the final email to Bennett on 18 April 2008, do not indicate that any agreement on the GST issue had been reached. Bush had been in attendance at the teleconference on 17 March where the agreement had purportedly been reached. However, in the subsequent emails Bush attempts to explain why the GST had been retained and does not mention any agreement. Further, the emails characterise the retention of GST as an alleged event of default. If an agreement had been reached, Bush would no doubt have stated so to demonstrate that an event of default had not occurred.

It is evident that there were opportunities, at least on 29 March 2008 and 18 April 2008 for the Borrowers to allege that they were entitled to retain the GST pursuant to the agreement that had been reached with MFS. The Borrowers did not do so. As such, I am not satisfied that any oral agreement was reached with regard to the GST issue. It follows that the Borrowers were in breach of the Loan Agreement by failing to remit the GST refunds in accordance with clause 4.3(c) of the Loan Agreement.

Additionally, the Borrowers were a trustee of the funds and committed a deliberate and continuing breach of trust by failing to remit three GST payments received from the ATO: $277,149 in November 2007, $489,565 in January 2008 and $291,160 in February 2008.

(b)Did MFS waive, elect not to pursue the event of default or acquiesce in the breach?

It was submitted by Senior Counsel for the Borrowers that although the Borrowers had withheld GST from December 2007, MFS did not rely on any default until March 2008. The Borrowers contend that MFS elected to allow drawdowns in January and February 2008 and therefore elected not to rely on the event of default under the Loan Agreement.

On this basis the Borrowers submit that MFS had elected one of two mutually inconsistent rights and thereby waived the right to rely on any default by the Borrowers in relation to GST at a later date. Further, the Borrowers submit that MFS acquiesced in the breach.

An election will be made if a party elects between competing and inconsistent rights.[24] In the context of a breach of contract, the party with the right to terminate for breach must elect to terminate the agreement or continue with performance of the contract notwithstanding the breach. Such an election can be by express words or conduct that is consistent with the continued existence of the contract.[25]
[24] Sargent v ASL Developments (1974) 134 634, 646.
[25] Carr v JA Berriman Pty Ltd (1953) 89 CLR, 348.

A waiver occurs when a party, with knowledge of the breach of contract, intentionally abandons a contractual right by acting in a manner inconsistent with that right.[26]
[26]Commonwealth v Verwayen (1990) 170 CLR 394, 407.

Relevantly, clause 9.4 of the Loan Agreement provides:

“No failure on the part of the Lender to exercise and no delay in exercising, and no course of dealing with respect to any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or power or the exercise of any power or right, and no waiver of any right, power or privilege hereunder shall be effective unless made in writing. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.”

Acquiescence occurs when the innocent party does not make any objection to the breach and allows the breach to continue. In such circumstances, the innocent party cannot then rely on the breach after it has acquiesced to it.[27]
[27] Duke of Leeds v Earl of Amherst (1846) 41 ER 886.

In my opinion, MFS was unaware of Mr Walsh’s decision to retain GST until the meeting on 17 March 2008 and Mr Walsh admitted in cross examination that he did not tell the Lender about his decision to withhold the GST. MSF therefore, could not be said to have elected between the inconsistent rights.[28] Similarly, MFS cannot be said to have acquiesced to the breach.
[28]There can be no election if the party is unaware of the breach in question: Brien v Dwyer (1978) 141 CLR 378

Further, continued performance of a contract does not constitute an affirmation of the contract where a party has expressly asserted a right to terminate but continues to perform subject to the preservation of that right.[29] On 16 March 2008, Snowden expressly stated in an email to Walsh that “MFS reserves their rights” in regard to the non payment of GST refunds. As such, there is insufficient evidence to indicate that MFS elected to affirm the contract.
[29]Wallace-Smith v Thiess Infracp (Swanston) Pty Ltd [2005] FCAFC 29, [87] and [89].

Further, clause 9.4 provides that the Lender’s failure to exercise a right or delay in exercising a right does not constitute a waiver of that right unless it is made in writing. In light of clause 9.4, MFS cannot be said to have waived its rights under the Loan Agreement with respect to the Borrowers’ retention of GST monies by its conduct in allowing the drawdowns or by its delay in exercising its rights with regard to the breach. Moreover, there is no evidence that MFS waived its rights in writing in any document.

In light of the above MFS did not, in my opinion, elect to affirm the contract, waive its rights or acquiesce to the breach.

(c)MFS cannot rely on the default by the Borrowers because it did not comply with its obligations under the Loan Agreement

The Borrowers allege that MFS cannot rely on the retention of GST as an event of default because:

(a) from September 2007, the necessity for withholding the GST was caused by or contributed to by MFS’s refusal to approve draw-downs; and

(b) from January 2008, the necessity for withholding the GST was caused or contributed to by MFS’s inability to make advances when required.

The Borrowers allege that at common law, a person cannot take advantage of the non-fulfilment of a condition, the performance of which has been hindered by himself and he cannot sue for breach of contract occasioned by his own breach of contract.[30]
[30]Alghussein Establishment v Eaton College [1991] 1 All ER 267.

The Borrowers further allege that if the remittance of GST was a precondition to allowing drawdowns, MFS cannot rely on the Borrowers’ non performance in equity and that the Borrowers should be treated as having remitted the GST or excused from not performing in circumstances where they had taken all proper steps to satisfy the precondition and that satisfaction has been rendered impossible to be performed or hindered by the neglect or default of MFS.[31]
[31] Panamena Europa Navigacion (Compania Limitada) v Federick Leyland and Co Ltd [1947] AC 428, 436.

MFS submits that not only was the failure to remit GST an event of default it was also a breach of trust and that a breach of trust cannot be excused by blaming the beneficiary.

In my opinion, MFS’s conduct did not contribute to the decision by Walsh to retain GST. Mr Walsh admitted that he had funds available to pay for the variations in November 2007 when he made the decision to withhold the GST. Further, the only claim for a draw down for variations that had been rejected by MFS was for the amount of $59,188 in Claim 12 in October 2007 and in any event this amount was not included in the drawdown notice because Bennett had told Walsh that she would not approve it. All of the other drawdown notices had been allowed. Consequently, on the date that Walsh made his decision to withhold the GST, MFS had not been consistently withholding funds.

Further, in my opinion, MFS did not cause the necessity of the Borrowers to withhold the GST from January 2008. First, there is no evidence that MFS was obliged to provide funding for FF & E. Secondly, by the end of January 2008, the Borrowers were already in breach of their obligations to repay the GST (having withheld the GST payment in November) and as such, MFS was within its rights to not make available any amounts sought by the Borrowers.

(d)Did MFS, as beneficiary, excuse the breach of trust by the Borrowers in withholding the GST?

In order for a defaulting trustee to be exonerated from a breach of trust, fully informed consent to the breach is necessary.[32] This can only occur after “full and frank disclosure of the facts”[33] has been made by the defaulting trustee. The extent of disclosure required to ensure that consent is fully informed is a matter of fact to be determined in the circumstances of each case.[34] Further, the trustee is required to know of the consent prior to the breach of trust.[35]
[32]         Maguire v Makaronis (1997) 188 CLR 449, 466.
[33]         Holyoak Industries (Vic) Pty Ltd and Anor v V-Flow Pty Ltd and Ors [2011] FCA 1154, [131]. This case related to breach of fiduciary duties.
[34]Holyoak Industries (Vic) Pty Ltd and Anor v V-Flow Pty Ltd and Ors [2011] FCA 1154,[133].
[35]         Byrnes v Kendle [2011] HCA 26, [77] per Gummow and Hayne JJ.

MFS submitted that it did not become aware that GST was being withheld until March 2008 and consequently, it could not have given consent to the breach of trust. It was submitted that, in fact, Walsh hid the breach of trust from MFS which was evidenced in him signing the drawdown notice for Claim 15 on 20 December 2007, which certified that the Borrowers had not committed an event of default under the Loan Agreement.

The Borrowers submitted that at all times MFS knew that GST had not been remitted because it had not received a GST payment since October 2007, was aware of a pattern of monthly GST remittances in the past and sent two reminders to the Borrowers in December 2007 and March 2008.

In light of the evidence above, in my opinion, fully informed consent was not given by MFS in relation to the breach of trust at the meeting on 17 March 2008 or at a later stage. This is particularly so given the fact that Walsh, Ebbels and Bush did not give any evidence that there was any discussion at the 17 March 2008 meeting regarding the retention of GST as an event of default, the reasons for retaining the GST or in whose interests the decision to retain the GST was made. Accordingly, there is insufficient evidence to indicate that MFS gave informed consent to the breach of trust.

In any event, the Borrowers allege that MFS consented to the breach of trust at the March 2008 telephone meeting which was after the breaches of trust had occurred. If consent was to be given, Walsh would have been required to have discussed the matter with MFS prior to his decision to withhold the GST in November 2007.

The Borrowers argue in the alternative that MFS acquiesced to the breach of trust. Acquiescence requires calculated inaction by the beneficiary which encourages the trustee reasonably to believe that their omissions were accepted or not opposed by the beneficiary.[36] In light of the discussion in the preceding paragraphs, it could not reasonably be said that the Borrowers reasonably believed that their action in retaining GST was acceptable to the beneficiary, particularly as MFS was unaware of the breach until 16 March 2008 and had “reserved its rights” in respect of the GST issue.
[36] Byrnes v Kendle [2011] HCA 26, [79] per Gummow and Hayne JJ citing Orr v Ford (1989) 167 CLR 316, 337–338.

Conclusion

In my opinion, the Borrowers committed an event of default under the Loan Agreement by failing to remit GST funds it had received to MFS within 7 days of receipt as required under clause 4.3(c). Further, pursuant to clause 4.3(c), the Borrowers were, as a consequence, in breach of trust by withholding the GST funds. The breach was deliberate and the decision to withhold GST was for the interests of the Borrowers and not MFS.

The Borrowers have not established that they should be excused from the breach of contract and have failed to establish that MFS elected to affirm the contract, waived its rights under the contract or acquiesced to the breach. There is insufficient evidence to indicate that MFS was in fact aware of the breach before March 2008. Further, there is insufficient evidence to indicate that an agreement was reached between MFS and the Borrowers at the March 2008 meeting. The contemporaneous documents after the meeting indicate that the GST issue was certainly discussed but falls short of establishing that an agreement was reached.

The Borrowers have also failed to establish that MFS provided informed consent to the breach of trust (or some form of subsequent ratification) and therefore should be exonerated from liability. No evidence was led regarding what was discussed about the GST at the March 2008 meeting. To provide informed consent, MFS would have required information including why the money was withheld, the consequences of withholding the GST and in whose interests the decision was made. There is insufficient evidence of these matters being discussed with MFS and as such, it cannot be said to have provided fully informed consent which would exonerate the Borrowers from their breach of trust.

It follows that the Borrowers are liable to MFS for the GST monies that were retained from November 2007 to February 2008.

Further and more relevantly it follows that under clause 4.3(a)(i) of the Loan Agreement MFS was not obliged to provide further funds.

III The pre-sales hurdles

The Forest Resort was required to meet certain pre-sales and debt reduction hurdles under the Letter of Offer and Loan Agreement.

The pre-sales hurdles are contained in clause 13 of the Letter of Offer. The clause is headed “Post Settlement Conditions”. Clauses 13.6, 13.7, 13.8 and 13.9 are as follows:

“13. 6Satisfactory pre-sales for hotel suites totalling $6,600,000 excluding GST are to be in place prior to [15 October 2006].”[37]
[37]The Borrowers accepted that each hurdle had to be met by the 15^th of the relevant month specified in the Letter of the Offer.

(the “October Pre-sales Hurdle”);
“13.7A further $12,800,000 excluding GST in satisfactory pre-sales for hotel suites (total of $19,400,000) is to be achieved by [15 September 2007].”

(the “September Pre-sales Hurdle”);
“13.8A further $6,400,000 excluding GST in satisfactory pre-sales for hotel suites (total of $25,800,000) is to be achieved by [15 March 2008].”

(the “March Pre-sales Hurdle”); and
“13.9Failure to achieve a total of $25,800,000 in satisfactory pre-sales by [15 March 2008] will be an even [sic] of default.”

(the “Clause 13.9 Pre-sales Hurdle”);
(together, the “Pre-sales Hurdles”).

The Forest Resort was also required to provide evidence of pre-sales to MFS. Clause 12 of the Letter of Offer deals with pre-settlement conditions. Pursuant to clause 12.7 of the Letter of Offer, the Forest Resort had to provide:

“…certified copies of pre-sale Contracts and details of deposits paid together with a completed schedule in a form to the satisfaction of the Lender’s Solicitor. “

Clause 12.7 also set out the requirements that pre-sales contracts had to meet to be “satisfactory”, namely:

“Such Contracts are to be “at arms length” and unconditional, with 10% cash, acceptable bank guarantee or acceptable deposit bond from an acceptable issuer and must be satisfactory to the Lender.”

Clause 13.8 required the Borrower to provide MFS with satisfactory monthly sales reports.

Clause 3.2(c) of the Loan Agreement required the Borrower to provide MFS with certified copies of all pre-sales contracts within seven days of each sale. Clause 3.2(f) makes provision for monthly reports regarding the status of sales.

The debt reduction hurdles are set out in clauses 13.10, 13.11 and 13.12 of the Letter of Offer. The Forest Resort was required to reduce the debt by:

(a)$1,726,363 through sales from the land subdivision by 15 May 2007 (the “May Debt Repatriation Hurdle”);
(b)A further $2 million (total $3,726,363) through sales from the land subdivision by 15 November 2007 (the “November Debt Repatriation Hurdle”); and
(c)A further $26 million (total $29,726,363) through sales from the land subdivision and the hotel suites by 15 May 2008 (the “May 2008 Debt Repatriation Hurdle”).

Clause 13.13 of the Letter of Offer makes the failure to reduce the debt by a total of $29,726,363 by 15 May 2008 an event of default.

MFS submits that the Forest Resort failed to meet the requirements of the March Pre-sales Hurdle, which MFS contends was an event of default under clause 13.9 of the Letter of Offer. MFS placed emphasis on the failure to achieve total pre-sales of hotel suites in the sum of $25,800,000 which it contends was a breach of clause 13.8 and as a consequence also 13.9. The Borrowers contend that the Forest Resort met all of the Pre-sales Hurdles and that, in any case, failure to meet the March Pre-sales Hurdle was not an event of default as clause 13.9 gave rise to a separate and different pre-sales hurdle that was not restricted to hotel sales and that this hurdle was also met. The Borrowers contend further that failure to meet the March Pre-sales Hurdle resulted only in the imposition of penalty fees under clause 11(e) of the Letter of Offer.

As discussed above, in my view the amendment agreement did not allow for the indiscriminate inclusion of any land pre-sales up to 33.33% of the September Pre-sales Hurdle amount. Rather, MFS and the Forest Resort reached a specific agreement regarding the inclusion of the pre-sales of the Laridworth and Stage 10 lots of land towards the September Pre-sales Hurdle. It is these, and only these, land pre-sales that can be counted towards the September, and consequentially the March, Pre-sales Hurdle.

The best evidence of what pre-sales constituted the Laridworth and Stage 10 lots pre-sales is contained in a schedule of sales prepared by Ms Ebbels for these proceedings. That document lists $2,996,000 worth of land pre-sales attributable to sales to Laridworth (not including sales counted towards debt reduction hurdles) and Stage 10 sales.

Using this figure, the Forest Resort had achieved $20,997,661 of qualifying pre-sales by 15 September 2007. This amounted to a surplus of $1,597,661 of pre-sales in comparison to what was required to meet the September Pre-sales Hurdle. Adding this figure to the $2,126,153 of additional hotel suite pre-sales made between the September and March Pre-sales Hurdles amounts to only $3,723,814 of relevant pre-sales. This falls over $2.5 million short of the $6.4 million worth of pre-sales needed to meet March Pre-sales Hurdle.

Thus, the March Pre-sales Hurdle was not met in relation to the required further pre-sales of $6,400,000. This failure is not specifically picked up in clause 13.9 which deals with the event of default in relation to the other aspect of the March Pre-Sales Hurdle, namely total sales of $25,800,000 of hotel suites. It is not strictly necessary to deal with the consequences of this failure given the conclusion I have reached in relation to total sales as set out hereunder.

According to Ebbels, the Forest Resort Hotel achieved $29,883,123 of hotel suite and land pre-sales by 15 March 2008.[41] This surpasses the required $25.8 million of the Clause 13.9 Pre-sales Hurdle by $4,083,123 if land sales are to be included, which I have found not to be the position.
[41]Ibid.

MFS raises a number of issues with the pre-sales that purportedly make up the $29,883,123 total, and the ability of the Borrowers to count them towards the Clause 13.9 Pre-sales Hurdle. In addition to the argument that clause 13.9 could only be met from hotel suite pre-sales, which I have already accepted, MFS submits:

(a)That certain pre-sales were not verified by the Clause 13.9 Pre-sales Hurdle due date;
(b)That a certain pre-sales were never verified;
(c)That certain pre-sales occurred after the 15 March 2008 hurdle deadline;
(d)That certain pre-sales were counted towards a Debt Repatriation Hurdle and thus could not be counted towards the Clause 13.9 Pre-sales Hurdle; and
(e)That no deposit was held for the Laridworth sales and they were thus not “satisfactory”.

MFS submits that these issues amount to $11,142,431 of pre-sales that cannot be counted towards the Clause 13.9 Pre-sales Hurdle. The Borrowers agreed to the removal of certain pre-sales from the hurdle amount as they occurred after 15 March 2008. These pre-sales amounted to $752,481.[42] The Borrowers contest the other issues raised by MFS.
[42]Ibid.

In relation to verification reports, as discussed above, the Letter of Offer did not require that such reports be provided by the hurdle date as long as the actual sale was demonstrably achieved by that date.

In relation to the pre-sales that were never verified,[43] I note that these sales were included in a summary of pre-sales provided to MFS and MFS did not allege that the pre-sales did not actually take place by 15 March 2008 or did not meet the requirements of clause 12.7. Once again, given my conclusion above regarding verification, it was not necessary for the Forest Resort to verify the pre-sales by the hurdle date as long as they were actually achieved and were satisfactory.
[43]Lot 95, Hosking, $280,000; Lot 96, Gallagher, $255,00; Lot 97, Vanderkley, $220,000; Lot 101, Ward, $250,000.

In relation to the sales that were also counted towards Debt Repatriation Hurdles, the Letter of Offer does not specify that pre-sales can only be used either towards a Pre-sales or Debt Repatriation Hurdle. While the amendment agreement to the September Pre-sales Hurdle does require that any land pre-sales used towards the September Pre-sales Hurdle are not be used towards the November Debt Repatriation Hurdle, this requirement was specific to the amendment to the September Pre-sales Hurdle and related only to the Laridworth and Stage 10 lots that are used to meet that hurdle. Such a requirement is not found in the Letter of Offer and, as found above, the amendment agreement did not amend any hurdle except for the September Pre-sales Hurdle. However, for the reasons given land pre-sales could not be counted towards the Clause 13.9 Pre-sales Hurdle. During cross-examination Ebbels accepted that if a land sale was used for debt reduction purposes it could not be used to meet a pre-sales hurdle.

In relation to the Laridworth sales, the terms of each Pre-sales Hurdle requires that pre-sales be “satisfactory”. The parties agreed that this required such pre-sales to comply with the criteria contained in clause 12.7 of the Letter of Offer, including that a deposit for the pre-sale must be made. However, in relation to the Laridworth sales, MFS specifically agreed to allow these sales to count towards the September Pre-sales Hurdle when making the amendment agreement. They cannot now be allowed to resile from that agreement by taking issue with these pre-sales at this stage. If I am incorrect on this view, I note that even if the Laridworth sales are removed from allowable pre-sales this will only deduct an additional $1,991,000 worth of pre-sales from those achieved.

Thus, having considered the issues raised by MFS in relation to each of the pre-sales relied upon by the Borrowers, I am of the view that sales occurring after 15 March 2008 as well as land sales cannot be included. This results in a reduction to the total satisfactory pre-sales made by the Forest Resort Hotel to $24,715,331.[44] This amount is lower than that required by the Clause 13.9 Pre-sales Hurdle, which was therefore not met. In any event I understood the Borrowers to agree that if land sales were not included the hurdle would not be met. This constituted an event of default. Clause 7.21 of the Loan Agreement specifically makes a failure to satisfy clause 13.9 of the Letter of Offer on event of default.[45] Two consequences follow. First, pursuant to clause 8.1(a) and (b) MFS was entitled to cancel the Facilities and require repayment of the Debt. Second, pursuant to clause 4.3(a) MFS was entitled to refuse any drawdown.
[44]$29,883,123 - $752,481 (sales after 15 March 2008) - $4,415,311 (land sales) = $24,715,331. I am not entirely satisfied with the accuracy of this figure. The evidence of Ebbels in this regard was not entirely satisfactory. There is some confusion as to what was to be included and what not. In my view none of this matters and mathematical precision is not required. On Ebbels own view if land sales were excluded the hurdle would not be met.
[45]The same result is achieved by using clause 7.1(a) (any default of the Loan Agreement) and clause 3.2(i) (requirement to satisfy clause 13.9 of the Letter of Offer).

G. Failure to allow drawdown – Claim 19

On 19 March 2008, the Builder agreed that the amount outstanding to complete the works under the Building Contract was $2,095,060, and that the costs of completing the project would not exceed that amount.

The Borrowers agreed with that, and as a result, MFS agreed to pay that amount.

Following additional payments by MFS, as at 20 March 2008, both the Builder and the Borrowers were fully paid-up. Walsh gave evidence of this in his witness statement, and confirmed it in cross-examination.

On 10 April 2008, MFS served Notices of Default on the Borrowers and the Guarantors under the Loan Agreement. The Borrowers had not submitted any drawdown notice in respect of Claim 19 before 10 April 2008. The only evidence before the Court on this point is to the effect that on 2 May 2008, WT Partnership Value to Complete Report No 19 dated 2 May 2008 (referring the amounts claimed) was sent to MFS.

As a result, MFS was not required to make available drawdowns to the Borrowers for Claim 19 because:

(a)the Notices of Default required the Borrowers to repay all amounts outstanding under the Facility; the outstanding amount identified in the Notices of Default had not been repaid by 2 May 2008 when, even on the Plaintiffs by Counterclaim’s best case, a claim for payment of Claim 19 was first sent to the Lender; as a result, as at 2 May 2008 the Borrowers had committed an ongoing Event of Default pursuant to clause 7.2 of the Loan Agreement; and
(b)the Borrowers failed to submit a drawdown notice which complied with the requirements imposed by the Loan Agreement: see clause 4.3(a)(iv) of the Loan Agreement.

In any event, the amount claimed in Claim 19 was for an amount that exceeded the amount agreed in March 2008 as between the Lender, the Builder and the Borrower as being the maximum amount required to complete the construction.

As at 19 March 2008, the Builder was not refusing to do further work. The refusal only came in May 2008 after the builder’s final invoice for $1,090,000 was not paid Walsh gave evidence in chief that the builder refused to carry out work on the air conditioning plant when it broke down, saying that “there’s one million and ninety thousand reasons why we are not coming back to complete the project”. This was the amount of the builder’s final invoice. That was after MFS had served the Notices of Default on 10 April 2008.

H. Causation

The critical question is whether any of the alleged breaches were a cause of the loss claimed. In this regard any causal connection is sufficient provided it was not negligible.[46] For the purposes of this section I have assumed, contrary to my findings, that the Plaintiffs by Counterclaim have established a relevant breach.
[46]March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, 522.

The “but for” test is a useful test. If but for the defendant’s breaches a plaintiff would not have suffered any loss, causation is established.[47] It follows that if loss would have been suffered anyway despite the breach no claim is available.
[47]See Carter’s Guide to Australian Contract Law 2^nd edition, 432.

If there is an event or circumstance that intervenes between any breach of contract and the consequent loss and this breaks the chain of causation, the defendant will not be responsible for the loss.[48]
[48]Ibid 432.

If the loss or damage arises in the usual course of things, the defendant is usually liable as the loss is presumed to be within the contemplation of the defendant. However, if the loss or damage is not a natural result, the defendant is usually only liable if both parties contemplated the probable result of the breach.[49]
[49]Ibid.

The loss claimed by the Plaintiffs by Counterclaim comprises the alleged inability to sell sufficient Hotel Suites and Residential Lots in order to generate the revenue required to reduce the loan and obtain the necessary and contemplated refinance. It is alleged that this loss flowed directly from the adverse publicity associated with the builder walking off the job because of the drawdown breaches.

The onus is on the Plaintiffs by Counterclaim to establish by admissible cogent evidence first that the failure to provide funds on time caused the Builder to walk off the job. Next, the Plaintiffs by Counterclaim must establish that adverse publicity was generated by walking off the job. Finally, the Plaintiffs by Counterclaim must establish that the adverse publicity had such an effect on sales that effectively prevented any refinance from taking place. For the reasons that follow each step in the process is not supported by the extremely limited and unsatisfactory evidence given in relation to causation.

To suggest that there is any link between late payment or drawdown and the failure to achieve the necessary required sales is fanciful in circumstances where the Builder did not walk off the job and the relevant stage of the project was completed on time. The evidence falls a long way short of establishing that the failure to sell Hotel Suites and Residential Lots was because of the consequences that followed from MFS being late in payment for a very short period of time.

Mr Wilkinson gave evidence as follows:

•That he was marketing most of the properties to Melbournians and to people interstate.
•That he had no knowledge of construction costs and payment and financing matters as between the Lender, the Borrower and the Builder including delays in payment to the Builder.
•In January 2008 there was some publicity about the Builder not getting paid, that this was local knowledge within the Ballarat area. He then gave evidence that he received such information from locals at the time, namely that the Builder had walked off site or was about to walk off site. Later he said that he had heard “about the distress of the project” and that “there were problems with the project in late January”.
•Although the project was opened in March 2008, it was not finished and the major reason was because the last tranche of money was not supplied.
•Walsh did not tell him to stop selling the suites but to the contrary was pushing and encouraging him to continue marketing the property. He stopped because the damage to the project had already taken place because of such local knowledge.

Walsh gave evidence to the effect that the Builder did not walk off site and that whatever the delay in paying the Builder this had no effect on the progress and completion of the works relating to the scheduled opening on 20 March 2008. His evidence was that he saw workers walking off site on television on or about 18 February 2008 and this caused the project to become a distressed project with the consequence that interest in the project and sales dropped dramatically. He also gave evidence that to the extent that there were late payments to the Builder, the Builder was cooperative and patient and the parties were working cooperatively in order to try and resolve the issue. He was therefore hopeful that things would work out.

The following dates and events are critical in assessing whether any conduct on the part of MFS caused the Borrower to suffer loss.

•         11 February 2008

-

Walsh becomes aware of the non-payment of drawdown no 16 (due 30 January 2008).

•         14 February 2008

-

MFS promises payment of $1 million by the ‘next Monday’ (18/2/2008).

•         15 February 2008

-

Builder negotiates for a secured position.

•         17 February 2008

-

Builder serves notice to show cause but maintains progress on site.

•         18 February 2008

-

$1 million is paid to Builder. Huge positive publicity about the Forest Resort and the recruitment drive.

•         25 February 2008

-

Communication between MFS (Bennett) and Walsh almost daily. No mention of any walk out.

•         29 February 2008

-

Walsh confirms that there is no question of the Builder going off site.

•         29 February 2008

-

Builder issues notice under Tripartite Agreement. (Builder unable to cease work during 21 day period).

•         3 March 2008

-

MFS agrees to drawdown 17 and split between drawdown 16 and 17.

•         14 March 2008

-

Builder withdraws offer to provide finance.

•         17 March 2008

-

Telephone conference. GST discussed.

•         18 March 2008

-

MFS confirms that it has the funds to complete.

•         19 March 2008

-

Builder confirms amount required to complete.

All amounts owing paid in full. Certificate of Occupancy issued.

According to the evidence of both Walsh and Wilkinson, by about mid-February until at the very least the opening on 20 March 2008 no sales were concluded and there was no marketing and advertising for the sale of any hotel suite or residential lot. It is not entirely clear when marketing and sales re-commenced.

The relevant question however is whether (assuming breach) the lack of sales was caused by MFS. Of course the immediate cause was the decision made by Walsh in about mid-February 2008 to cease marketing and sales. However the more relevant question is whether any breach on the part of MFS in effect caused or justified the decision made by Walsh. Put another way, if the decision was not taken would any breach have caused a relevant lack of sales in any event.

I am not satisfied to the requisite degree that the failure to sell Hotels Suites and Residential Lots was caused by any of the alleged breaches. The evidence is entirely lacking and does not support such a finding. The Plaintiffs by Counterclaim have failed to discharge their onus in this regard.

I do not accept and the evidence does not establish that in a multi million dollar project of the nature and complexity under consideration, late payment, short payment, or even non-payment of the kind and to the extent alleged had the dramatic effect contended for. The evidence does not establish the necessary causal nexus even accepting the breaches. I am inclined to agree with the characterisation by MFS of Wilkinson’s evidence as “irrational and defies common sense”.

Central to the submissions made by the Plaintiffs by Counterclaim is the assertion that the Builder walked off site on or about 15 February 2008 because of non-payment and as a direct result the Forest Resort became a distressed project with the flow on effect of no or limited sales. It was suggested that as a consequence no-one would buy and no financier would finance the acquisition of a Hotel Suite or Residential Lot in a distressed project. Causation, it was contended, was established because the Forest Resort became a distressed project because of non-payment to the Builder.

However, the evidence does not establish the critical matters that underpin this central and critical submission. In fact the evidence is totally lacking. The evidence of Walsh and Wilkinson in relation to causation (so far as it went) was entirely unsatisfactory. It was general, speculative, conclusionary, implausible, self serving, unsubstantiated and indeed wishful. I do not accept the evidence as providing any basis whatsoever for concluding that there was the necessary causal link between the limited non-payment or late payment and the failure to sell hotel suites and residential lots, although I suspect that both Walsh and Wilkinson believe their own unsubstantiated rhetoric.

There is no evidence that the Builder or any sub-contractor walked off site on 15 February 2008 or at any stage. If there was a perception or rumour to such effect (which I do not accept and the evidence does not sufficiently establish) it was not based on anything that MFS said or did.

Walsh in fact agreed that the Builder did not walk off site but said that he had threatened to do so. Wilkinson said that he heard from relatives in Ballarat that the Builder had walked off site and that rumours to such effect were circulating in Ballarat. I do not accept this evidence. Apart from Wilkinson there is no evidence of the alleged rumours. They were in any event not based on fact and it is nothing short of extraordinary that Wilkinson did not raise the matter with Walsh.

The short point is that the evidence does not establish that anyone walked off site at any stage let alone because of any non-payment. In any event the Builder was not able to cease work because of various provisions contained in the Tripartite Agreement.

In relation to the progress of the work, the evidence establishes that in 2008 and until the opening there was continuous visible progress and indeed the project was finished earlier than anticipated. There is no evidence of any delay, disruption or interruption in the works. Consequently it is difficult to see how non-payment or late payment had any effect on the progress of the building works and the development within the contemplated time frame. If there was any breach it did not cause any delay in the works.

Further, the evidence does not establish that the Forest Resort was a distressed project at all and MFS cannot be held responsible for any rumours that may have impacted on sales, if indeed this was the case.

Further, it is of relevance to note that not one potential investor or banker gave evidence as to why such investor or banker chose not to invest or provide finance in relation to the Forest Resort.

In conclusion, I am of the opinion that the evidence is entirely lacking to the effect that investors did not invest in the Forest Resort because of rumours in relation to the distressed project. The evidence of Walsh and Wilkinson falls far short of establishing the relevant matters. I was unimpressed by their evidence in general and in particular in relation to causation even apart from their obvious substantial interest in the outcome of the case, which in the case of Wilkinson he deliberately tried to minimise.

Consequently, in my opinion the reasons for the Borrowers failing to achieve $25.8 million of satisfactory pre-sales by 15 March 2008 had nothing to do with the actions of MFS.

So far as may be relevant, the most likely causes for the Borrowers’ failure are:

(a)the Walsh family’s desire to retain as many of the hotel suites as they could as a legacy for the future (they were relying on the Facility being refinanced with a financier who would be prepared to allow lower sales targets);
(b)the Borrowers not putting real efforts into marketing sales because they were instead focussed on completing the construction of the hotel;
(c)potential purchasers being put-off by media reports of the Former RE’s serious financial difficulties; and
(d)the effects of the global financial crisis; and
(e)Wilkinson’s grossly unreasonable decision to cease marketing and sales.

I. Misleading or deceptive conduct

The Plaintiffs by Counterclaim allege that between 21 January 2008 and 11 February 2008, MFS misled them into believing that all funds due under the Facility would be provided within the time frames provided for in the Loan Agreement.

The Plaintiffs by Counterclaim contend that the result of the alleged conduct was that:

(a)the Borrowers were unable to refinance the Facility in sufficient time to repay Perpetual by 15 August 2008;
(b)the Borrowers would have continued to negotiate with First REIT to sell Hotel Suites; and
(c)the Borrowers would have negotiated with the Builder in respect of unpaid claims for work done and avoided the Builder ceasing work on the Forest Resort Development.

MFS contends that to the extent that the January 2008 representations were to the effect alleged, the Plaintiffs by Counterclaim did not in fact rely upon them because amongst other things they were aware of, and believed, the contemporaneous and widely publicised adverse reports in the media of the MFS group of companies’ serious financial troubles.

In the very narrow time period (i.e. 21 January 2008 to 11 February 2008) in question, and before and after, the Borrowers did not pass-up any opportunity to refinance the Facility. In fact, the Borrowers continued to pursue a funding application with Bankwest, which had been lodged well before 21 January 2008.

Further or alternatively, the Borrowers did pursue at least two lenders in the period after January 2008, namely, Bankwest and Mirvac. Neither offered terms that were acceptable to the Borrowers. The conclusion to be drawn is that the Borrowers would not have been able to refinance in any event. This aspect is dealt with in more detail below.

Further, the Borrowers failed to diligently and/or genuinely pursue sales of hotel suites to First REIT. This aspect is dealt with in more detail below.

It is worth emphasising that in any event the hotel was completed and opened to the public on 20 March 2008 as envisaged by the parties.

I Refinancing of the Facility

Walsh confirmed in cross-examination that Bankwest and ANZ were approached in the early stages of the development to finance the villas, but no offer of finance of forthcoming from the ANZ and they “didn’t get to that point”.

The only Bankwest offer prior to its final offer in 2009 was not an offer of finance for the hotel construction, but rather for the villa stage and early works program.

Walsh’s evidence was that the Borrowers went to Bankwest to get finance for the hotel construction, but did not reach the stage of getting an offer.

In cross-examination, Walsh confirmed that the negotiations with Bankwest commenced in September 2007. It was intended to have an agreement in place by December 2007.

Having approached Bankwest, Walsh actively pursued it from September 2007 through to March 2008. During the same period Walsh expected Bush to be looking to bankers other than Bankwest. In fact, Bankwest was pursued until 2009.

Accordingly, the Borrowers would not have secured a refinancing from Bankwest even if the December Claim had been paid by 31 January 2008, and even if McBain had not made the statements in her emails of 21 January and 4 February 2008. Nothing MFS did would have changed the fact that in January and February 2008, Bankwest was many months away from being in a position to decide whether or not it would be prepared to refinance the Facility. In any event, all funds due under the Facility were provided.

Financing for FF & E

Walsh first approached Bankwest to finance the FF & E on about 28 December 2007.

Walsh only really turned his mind to funding the FF & E in early January 2008. He explained this on the basis that FF & E was generally something scheduled close to the completion, and he agreed that at one stage he had the view that he could organise that funding as late as a month prior to completion of a hotel.

Walsh maintained his view that funding for the FF & E could be arranged one month prior to the hotel completion, but that got derailed when MFS had its adverse publicity.

By 13 January 2008, Walsh was expressing his concern that the FF & E funding was then critical and that in terms of the funding that needed advance order time, they only needed one to renege and that could affect the opening of the hotel and bookings. By 16 January 2008, Bush was exploring the prospect of approaching a number of FF & E financiers on the basis that they take a second mortgage behind MFS. Once MFS’s adverse publicity occurred, prospective FF & E funders did not want to sit on a second mortgage behind MFS. Further, a number of the FF & E funders walked out the door once that publicity became apparent.

On 31 January 2008, Walsh made a comment to Bush: “… we don’t believe it’s in our best interest to show Bankwest our underbelly”.

Notwithstanding his inability to recall what that comment was directed to, after having been taken through some material in the courtbook Walsh identified the “underbelly” as “the opportunities of other funders being available”, and then as being “in respect to our need to be able to have an urgent reply” from the banks. Whatever was meant by that comment, it showed that at the end of January 2008, and before any complaint about non-payment to the Builder, the Borrowers were in a serious situation in respect of obtaining appropriate funding to ensure that the hotel could open at the time it was to be completed in March 2008.

The position with FF & E funding at the end of January 2008 was that there was no funding from Bankwest, nor from MFS, and the Borrowers were looking elsewhere for that funding. As at that time the Borrowers were already taking bookings for conferences at the hotel.

Walsh confirmed that those funders who were seeking a second mortgage position behind MFS “recanted indicating they did not wish to stand behind a senior lender who was exposed to the possibility of moving into administration and risking their security”.

The strategy based on offering FF & E financiers a second security position behind MFS evaporated within a week of the MFS publicity commencing.

II First REIT

MFS submits that the Borrowers’ negotiations with First REIT to purchase $10 million worth of hotel suites had unsuccessfully concluded by the end of January 2008 because their respective commercial bottom lines were too far apart. That position, it was submitted, was not affected by any conduct on the part of MFS. It was submitted that nothing that MFS did prevented the Borrowers from re-engaging with First REIT. They chose not to do so, it was submitted, because they knew that the commercial gap was too large to accommodate. In my opinion, the evidence, as referred to below, supports such a conclusion.

Mr Chan of First REIT asked a series of questions on 3 August 2007. The general nature of the deal proposed was a purchase of units for $10 million, and a 25 year leaseback by one of the Walsh companies from First REIT.

Walsh always appreciated that Chan himself did not have the power to say yes or no, but that a decision had to be made by a board or committee.

A week later, Chan asked some further questions, this time emanating from his “management”. Walsh knew that Chan had to go to outside advisers on a variety of questions including the structure of the scheme, the special purpose vehicle to be used, questions of tax and questions as to his bankers.

On 27 August 2007 Chan asked a couple of other questions relating to the track record of the Borrowers and the track record of ACCOR.

Walsh accepted that the leaseback to Rytelle Pty Ltd was the aspect where the question of what return could be achieved was important.

By 21 September 2007 the parties were exchanging amendments to the memorandum of understanding (“MOU”). Part of that exercise was to determine what the actual returns might be.

In about mid-September 2007, one of the issues being debated was the length of the due diligence period that would be permitted. At that point, tax issues were yet to be determined, as were corporate issues, the special purpose vehicle and capital structures.

By 24 September 2007, Chan was asking further question about the units themselves. As at 26 September 2007, the due diligence had not started, nor had Chan nominated what he needed in order to conduct his due diligence. At that time they were still working on the engagement of tax advisers.

By 3 October 2007, Chan asked further questions to be answered and pointed out that they had still not engaged their accountants and other consultants. That information was needed in order to start the due diligence.

By 12 October 2007, First REIT had not received its advice on the questions of tax structures and had not even appointed its tax adviser.

By 26 October 2007, the information Chan had requested had not been supplied.

By mid-November 2007, the information Chan had requested had still not been supplied.

By 3 December 2007, the accountants were in touch with Chan asking him to identify what his requirements were. Whilst Walsh was not certain that no information had been provided, he agreed that the sequence of documentation revealed just that — namely that Chan had not received answers to his questions.

By 28 December 2007, the questions Chan had asked had still not been answered in full, and Chan was requesting an extension of the MOU period; however, there had been no agreement on when it would commence or what the final date was.

As at 28 December 2007, Chan advised Walsh that the following sequence was still to occur:

(a)they were getting a second opinion on tax matters;
(b)once that was in place, they would confer with their banker about financing; and
(c)once those two things had been finalised they could indicate the triple net rental amount, ie the returns.

As at 29 December 2007, the structure of the arrangement had not been finalised.

By 8 January 2008, the accountants provided part of the information which Chan was seeking. Further, by that time Chan had still not commenced his due diligence. Nor had he heard about his tax structures and capital structures.

By 19 January, 2008, Walsh was inquiring as to whether the parties could “move forward in a timely manner to assess if contracts of sale conditions can be resolved”. By that time, Walsh agreed that no steps had been taken to formally document the deal, the due diligence had not been done and Chan had not confirmed that he had final tax advice or capital advice or structure advice.

By 21 January 2008, Walsh and Bush exchanged emails debating the return that First REIT was seeking and whether it was reasonable. First REIT was seeking a small margin over 8%, as to which Walsh took the view that that return would actually count them out of the deal.Bush’s response was that he agreed and “this would then be a very expensive form of quasi debt” and he described First REIT as “greedy”.

In the exchange, Walsh indicated his top range was 7.5% and Bush responded that 7% as a top figure was reasonable. On 29 January 2008, Chan put forward his indicative terms, which included base rent commencing at 8%, rent payable half yearly in advance, rental escalation at 1% plus CPI and rent to be guaranteed for the entire leased term. In addition, Chan was seeking a banker’s guarantee.

On 30 January 2008, Walsh responded saying that “we cannot make this proposal work our end”. Walsh’s response listed the reasons why Chan’s proposal was not acceptable and his response is in bold type on the face of the email.

On 31 January 2008, Chan responded telling Walsh, amongst other things, that he should proceed to sell the units, which had been previously reserved for First REIT. By that time:

(a)Walsh was not certain what due diligence Chan had completed;
(b)Chan had not come back and said that he had his final tax advice, nor his final financial advice, nor his structural advice;
(c)there had been no proffering of the transaction documents; and
(d)there had been a delay in giving him information which had been requested, between 3 October and 8 January.

Notwithstanding Walsh’s attempts to suggest that negotiations were continuing, it is clear that the First REIT deal never got close to consummation, and was therefore never a realistic chance. It is also apparent that this had nothing whatever to do with any alleged failure to pay the Builder, and everything to do with the fact that the terms that First REIT was driving for were unacceptable to Walsh.

Walsh explained that the reason they did not go back to Chan later in time was that the health and wellness facility was central to First REIT’s interest and it had not been finished. However, Walsh’s evidence was that the health and wellness space was finished, but that it was not fitted out. The problems with fitout financing cannot be laid at the feet of the Former RE. It never agreed to fund FF & E.

III Negotiations with the Builder

As pointed out, the Builder did not walk off the job and nothing of any relevant consequence or legal relevance occurred in relation to the Builder prior to service of the default notices. On 20 March 2008, the day of opening, nothing was owing to the Builder and the hotel opened on schedule. This was a cause for celebration – which indeed occurred – and not complaint.

J. Interest at the higher rate of 16%

In my opinion, the charging of default interest at the higher rate of 16% does not constitute a penalty. The evidence establishes that the higher rate was a market rate. Further, it has not been established that the rate was an extravagant rate out of all proportion to the loss suffered by MFS. In fact there was no evidence at all to suggest that the rate came anywhere near to constituting a penalty.

It follows that the Guarantee will not be set aside on this basis. Even if I am wrong about the penalty point, it would not have the effect of avoiding the Guarantee and would at best affect the quantum of the debt.

K. Disposition

For the reasons given none of the claims by the Plaintiffs by Counterclaim are made out and the Counterclaim will be dismissed. Perpetual is entitled to judgment in an amount to be determined.

SCHEDULE OF PARTIES

BETWEEN

PERPETUAL NOMINEES LIMITED (ACN 000 733 700)	Plaintiff / First Defendant by Counterclaim
RYTELLE PTY LTD (ACN 105 101 639) (Receivers and Managers appointed)	First Defendant / Plaintiff by Counterclaim
THE FOREST RESORT OPERATIONS PTY LTD (ACN 100 823 201)	Second Defendant / Plaintiff by Counterclaim
JOAN PAMELA WALSH	Third Defendant / Plaintiff by Counterclaim
JAMES WILLIAM WALSH	Fourth Defendant/ Plaintiff by Counterclaim
THE FOREST RESORT OPERATIONS PTY LTD (ACN 105 101 639)	Plaintiff by Counterclaim
THE FOREST RESORT PTY LTD	Plaintiff by Counterclaim
THE FOREST RESORT HOTEL PTY LTD	Plaintiff by Counterclaim
WELLINGTON INVESTMENT MANAGEMENT LIMITED (ACN 101 634 146)	Second Defendant by Counterclaim

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• 11 February 2008	-	Walsh becomes aware of the non-payment of drawdown no 16 (due 30 January 2008).
• 14 February 2008	-	MFS promises payment of $1 million by the ‘next Monday’ (18/2/2008).
• 15 February 2008	-	Builder negotiates for a secured position.
• 17 February 2008	-	Builder serves notice to show cause but maintains progress on site.
• 18 February 2008	-	$1 million is paid to Builder. Huge positive publicity about the Forest Resort and the recruitment drive.
• 25 February 2008	-	Communication between MFS (Bennett) and Walsh almost daily. No mention of any walk out.
• 29 February 2008	-	Walsh confirms that there is no question of the Builder going off site.
• 29 February 2008	-	Builder issues notice under Tripartite Agreement. (Builder unable to cease work during 21 day period).
• 3 March 2008	-	MFS agrees to drawdown 17 and split between drawdown 16 and 17.
• 14 March 2008	-	Builder withdraws offer to provide finance.
• 17 March 2008	-	Telephone conference. GST discussed.
• 18 March 2008	-	MFS confirms that it has the funds to complete.
• 19 March 2008	-	Builder confirms amount required to complete.
All amounts owing paid in full. Certificate of Occupancy issued.

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5 February 2013