Sklash Pty Ltd v Yarra Capital Group Pty Ltd

SUPREME COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

Not Restricted

Proceeding no. 8474 of 2003

SKLASH PTY. LTD. (ACN 083 360 034)
Plaintiff
-v-
YARRA CAPITAL GROUP PTY. LTD. (ACN 094 615 657)
& STEVEN GOLDBERG	Defendants

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JUDGE:	MASTER EVANS
WHERE HELD:	MELBOURNE
DATE OF HEARING:	3 August 2004
DATE OF JUDGMENT:	7 October 2004
CASE MAY BE CITED AS:	Sklash Pty Ltd -v- Yarra Capital Group Pty Ltd
MEDIUM NEUTRAL CITATION:	[2004] VSC 385

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REASONS FOR DECISION

EQUITY – summary judgment application – whether triable issue – variation of deed by parol agreement unsupported by consideration – no action in reliance on agreement.

Penalty – interest on default – no disproportion between loss suffered and interest payable – relationship between parties – no demonstrated unconscionability.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr. P. D. Crutchfield	Clayton Utz Lawyers
For the Defendants	Mr. D. A. Klempfner	Velos & Davis Solicitors

In this proceeding the plaintiff (‘Sklash’) seeks summary judgment against the defendants pursuant to Rule 22.02 (Supreme Court (General Civil Procedure) Rules 1996) in the belief that there is no defence to the claims it has made in the statement of claim in the writ. These claims are made against the first defendant (‘Yarra Capital’) as borrower pursuant to six loan agreements each made by a deed for the balance due in respect of each loan. The claims against the second defendant (‘Goldberg’) are made against him as guarantor of performance of its obligations under each of the loan agreements.

The defendants each admit the execution of each of the deeds of loan and guarantee and the agreement to advance the relevant sum of money but deny the terms pleaded, the advances pleaded and the breaches pleaded. They do not plead that the deed or guarantees themselves contained terms other than those pleaded. They did plead that subsequent to the execution of each of the deeds and guarantees there was an agreement made to vary the terms of the loan agreements.

Accordingly it was not necessary in this application to prove execution of the deeds or the guarantees. It was necessary to prove the terms of each deed and guarantee, the making of the advances and the breaches of the terms of each of the loan agreements and of the terms of each of the guarantees. In an affidavit sworn in opposition to the application Goldberg stated:
(i)the plaintiff and the defendants have had commercial dealings with each other for a number of years and that a number of deeds similar to those detailed in the statement of claim have been entered into between the parties;
(ii)his ‘firm belief’ that all principal amounts due and payable under all deeds including the six deeds referred to in the statement of claim have been paid.

Significantly he does not state that the deeds and the guarantees contained terms different from those pleaded. It is implicit in the assertions which I have detailed and those circumstances that the deeds as pleaded were entered into in the terms pleaded and that the advances agreed to in them were made.

There were in any event a number of acknowledgements by the defendants of the moneys due under each of the deeds which are detailed in paragraphs 42 – 55 of Ben Kamer’s affidavit in support of this application sworn 15 June 2004. It is not necessary to restate them in these reasons.

The plaintiff took advantage of an opportunity given to it to put in evidence what the deponent stated were originals of each of the deeds and guarantees. Copies of each of these documents had been exhibited to the original affidavit in support of the application to which Goldberg’s affidavit responded.

Counsel for the defendant pointed out the following matters in respect of the original documents:
(i)The fourth guarantee was executed by Goldberg as director of Yarra Capital and purportedly on its behalf. Its terms were nonetheless acknowledged by him. It is obvious that the execution clause has been incorrectly typed. Given the admissions as to execution of this guarantee made by Goldberg and the absence of any other evidence to the contrary, he should be taken to have acknowledged, quite properly, that his signature to the guarantee should be treated as appended in his character as guarantor.
(ii)In the execution clause of the third deed (29 April 2002) an incorrect ACN number for Sklash had been typed in the document. It has been crossed out and the correct number inserted by hand. There was no evidence that this had occurred after the deed was executed. Given the admission as to its execution nothing turns on this point.
(iii)The loan agreed to in the third deed was in the sum of $85,000. Goldberg was described in the deed as the guarantor of that loan and signed it in that capacity. The document put in evidence as the original guarantee in respect of the obligations of the first defendant under that deed states the principal sum guaranteed as $65,000. If the document exhibited is indeed the original guarantee it has been executed under a mistake capable of rectification. On the same day the third deed and guarantee were executed, the second deed and the second guarantee were executed. The second deed provided for an advance of $65,000 and the repayment of that sum was guaranteed by the second defendant in the second guarantee. This was probably the source of the error in the third guarantee. Given the admissions of due execution of a guarantee in respect of the sum of $85,000 agreed to be lent pursuant to the third deed quite properly made by Goldberg, nothing turns on the need to rectify that guarantee to reflect the admitted intentions of the parties.
(iv)The original guarantee exhibited as the fifth guarantee is undated. In it Goldberg guarantees due performance by Yarra Capital of the covenants and obligations under the primary security described in the schedule to it as ‘loan agreement bearing even date herewith…pursuant to which the lender has advanced to the borrower the sum of $25,000’. Yarra Capital has admitted executing a deed on or about 3 June 2002 pursuant to which Sklash agreed to advance $25,000 to it. Goldberg has admitted executing a guarantee in favour of Sklash on or about 3 June 2002. The affidavit in opposition has, as I have pointed out above, impliedly admitted execution of all the deeds and guarantees. The defendants do not suggest that the deeds embodying the fifth loan agreement and guarantee were in a different form or that there were other deeds similar executed on or about that day. I am satisfied beyond reasonable doubt that these are the documents executed by Sklash and Goldberg on or about that date.
(v)The original affidavit in support of this application exhibited a copy of the deed embodying the fifth loan agreement. That document is in the same terms and appears to be identified with the original exhibited to the later affidavit filed on behalf of Sklash but it is clear that the signatures on page 7 of it are not the same as those on the original. Given the admissions to which I have referred above in discussing the proof of this deed, this lack of conformity is immaterial. It is more probable than not that, as is commonly the case, more than one original counterpart of the agreement was signed by the parties.
(vi)The original deeds embodying respectively the fourth, fifth and sixth loan agreements are not executed by Sklash. Given the admissions made in respect of the entry by the parties into loan agreements embodied in deeds on or about the dates alleged and the absence of any evidence of any other loan agreements in respect of sums in the respective amounts agreed to be advanced on or about those days I am satisfied beyond any reasonable doubt that these documents embody the agreements made between the parties and in respect of which Sklash claims in this proceeding. Yarra Capital has executed and delivered each of these deeds and has taken the benefits under them. At law it is bound by them (Naas -v- Westminister Bank Ltd (1940) AC 366 at 374). I know of no principle of equity which would relieve it of its obligations under these deeds simply because Sklash has not executed them.

Having advanced those arguments as to the ‘technical’ deficiencies in Sklash’s proof of the case, counsel proceeded to outline what he described as the defendant’s ‘substantial’ defences. One of those defences is pleaded. The other is not.

The pleaded defence is in paragraphs 69, 70 and 71 of their amended defence. The defendants plead a variation made on or about 25 February 2003 of the terms of each of the deeds embodying the loan agreements under which Sklash claims, performance by Yarra Capital of the agreements as varied and an estoppel preventing Sklash from relying on the provisions of those deeds to the extent that such provisions are contrary to the variation agreement.

The variation alleged is to the effect that:
(a) the due date in each deed ‘would be postponed until such date or dates as the first defendant received monies from Bryan McMurray and other parties to whom Yarra Capital has lent money, on which date (sic) whatever monies were received by the first defendant would become due and payable to the plaintiff’ and
(b) the first defendant’s interest obligations to the plaintiff would be limited to 7% per annum on the sum of $100,000 borrowed by the first defendant from the plaintiff on or about 18 February 2002. Goldberg’s verification of the variation agreement is studiously laconic.

The operation of the postponement agreement is almost impossibly unclear from its terms. Does it mean that the due date under each deed is postponed until any person who is properly described as a third party or McMurray (who may or may not be so described) to whom Yarra Capital has lent money pays money to it? If so to what extent do the moneys under each deed become due? Is the money received to be applied pro rata to the amounts due under each deed? How will Sklash know that the postponement has come to an end and the amount received from such persons? How does it identify such persons? How does it know what has been lent to such persons at the time the variation was made?

The agreement is, in addition to being very vague as to its operation, extraordinarily favourable to Yarra Capital. It may have been the case that the moneys lent to such persons represented much less than was due under the deeds. I note that the variation was not confined to moneys lent to Yarra Capital and on-lent by it. As pleaded it is not an agreement that once a sum advanced by Sklash or part of it on-lent by Yarra Capital is repaid to Yarra Capital that amount becomes repayable under the deed pursuant to which it was advanced. The effect of the variation is to replace certainty with uncertainty and to transfer the risk as to repayment from Yarra Capital to Sklash. Finally, interest under each deed would no longer be payable in accordance with the terms of each deed. Instead Sklash would only be entitled to interest at 7% on the sum advanced pursuant to the first loan agreement.

No consideration moving from Yarra Capital for the making of the variation agreement is pleaded or proved. No action by Yarra Capital to its detriment and in reliance upon its terms is pleaded or proved. It was not argued, nor could it be, that this arrangement was simply a waiver of the consequences of non-performance of the obligations to repay the debts at the times agreed in the deeds.

At common law a deed could only be varied under seal but equity has modified that rule (Steeds –v- Steeds (1889)22 QBD 537; Berry-v-Berry (1929) 2 KB 316 at 319). It may be varied by a simple contract made for valuable consideration (Berry-v-Berry, ibid, at 319). Further a party to a deed may be estopped from relying on its terms if it agrees to modify its strict rights under the deed with the intention that that agreement be legally binding and the other party to it acts to its detriment in reliance on the agreement, even though the agreement was made without consideration, to the extent that it would be inconsistent with the agreement to do so (Combe-v-Combe [1951] 2 KB 215 (CA)).

In his affidavit in opposition to this application Goldberg states that he has a ‘firm belief’ that all principal amounts due and payable under all the deeds pursuant to which Sklash had lent Yarra Capital money have been paid. It is to be noted that he expresses no belief as to the payment of interest or other sums payable under such deeds.

Of course the statement of belief is immaterial if not supported by evidence as to its basis. He then stated (in paragraph 5) his knowledge that payments have been made in reduction of the obligations under the deeds. In the previous paragraph of the affidavit he defined the six deeds referred to in the statement of claim as the ‘six deeds’ and uses the definition in succeeding paragraphs (paragraph 6 & 7) of the affidavit. I can only conclude that the deeds referred to in paragraph 5 are the deeds similar to the ‘six deeds’ referred to in paragraph 3. However, he exemplifies those payments by exhibiting four copy receipts which appear to be documents printed from a National Bank internet site which purport to record fund transfer details from an account entitled ‘4 The Avenue A/C’ to an account in the name of Sklash with the Australia and New Zealand Banking Group Ltd on (respectively) 11 June ($15,000), 18 July ($15,000), 15 September ($10,000), 10 October ($15,000) all in 2003. Then in paragraph 7, somewhat elliptically, he asserts that those payments were made ‘in reduction of the six deeds’. He exhibits to that paragraph copies of facsimile letters sent to Sklash after each of six payments were made to it confirming the amounts of those payments and to which deeds payments were to be credited. Four of the facsimiles appear to refer, respectively, to the payments recorded in the ‘receipts’. None of the facsimiles provide any reference to any of the six deeds. At best they record an assertion by Goldberg, not otherwise verified, of what Goldberg says was due to Sklash on the dates each bears. As at the date of the last of the facsimiles he asserts that there was $360,000 still due. Even if it is assumed that each of the four payments was made in reduction of obligations under the six deeds the documentation does not provide any foundation for his belief that all moneys payable to Sklash have been paid. It is significant that in his less than convincing affidavit Goldberg fails to depose to each of the loan transactions Yarra Capital has had with Sklash and provide a comprehensive account of all the payments made to it. Such an account could have put his belief on a firm foundation. Instead he complains that despite demand (not particularised), Sklash is yet to provide overall accounting of the crediting of payments made by the ‘Defendants’ (sic).

By contrast with Goldberg’s statements of belief the plaintiff provided a detailed verified account of all its loan transactions including those pursuant to the six deeds recording the payments made and explaining the manner in which it has allocated all payments received in respect of those loans.

It was not disputed that absent any allocation by the debtor or agreement to the contrary the creditor was entitled to allocate moneys received from it as it chose. In this regard I note that each deed provided that all moneys received (pursuant to the Deed) should be applied first in satisfaction of accrued interest and secondly in satisfaction of the principal sum. That provision would only come into operation if a payment was allocated to the liability under the particular deed.

The four payments apparently evidenced in the receipts and facsimiles exhibited are recorded in an appropriation table as allocated in payment of default interest due under the first loan deed.

Further the plaintiff has put in evidence certificates in accordance with the terms of each of the deeds and guarantees stating the amounts due under each of them. Such certificates are agreed to be prima facie evidence of the matters specified in them in each of the deeds on which Sklash sues.

In these circumstances I must conclude that nothing advanced by the defendants could constitute a ground for a defence.

It was further submitted on behalf of the defendants that the provision in each of the loan deeds for payment of a fixed sum as daily ‘interest’ in default of repayment of the loan on the due date was in the nature of a penalty. Counsel for the defendants prepared a chart (see schedule A) which shows the annual interest chargeable at that rate and expresses it as a percentage of the principal sum on the assumption that ‘the loan’ means ‘the principal sum’ as defined in each deed. In analysing his submission I will proceed on that assumption, although it is by no means clear that it is correct, as ‘the loan’ is used in the relevant clause of the schedule (clause 6) in contradistinction to the ‘principal sum’.

The schedule illustrates that default in repayment on the due date attracts interest on the principal sum at annual rates ranging from approximately 120% to 183%. It was contended that the daily default amount applied notwithstanding the repayment of part of the principal sum. I will accept that assumption for the purpose of analysing the submission.

It was concluded that such a provision cannot amount to a genuine pre-estimate of the damage which would be suffered by reason of the failure to repay on the due date. The argument proceeded in a vacuum as all that is known that is relevant to assessment of the damage which Sklash might suffer is the fact that it is in the business of money lending. It might be inferred from its course of dealing with Yarra Capital that it engages in high risk lending as it advanced the moneys on no more security than a personal guarantee.

A closer examination of the loan transactions than was made in argument before me puts the apparently high interest rates in context. Each loan deed provided for payment of a fee when the loan was repaid. This appears to be the price payable by Yarra Capital for the use of Sklash’s money for the period of each of the loans. I have prepared a chart (schedule B) which shows what each such fee would represent as annual charge and as a percentage of the principal sum. It is difficult to discern any pattern in the calculation of the fees save for the flat rate of $10,000 charged in respect of four of the loans albeit in one case for a three month period. What this chart illustrates is that in respect of two of the loans the default rate annualised is less than the rate charged for the use of the money for the period of the loans. It also provides evidence of the fact that Sklash was able to lend its money at an excessive interest rate of up to 240%. How then can it be said that the default interest rates ‘exceed by a wide margin the greatest loss which (Sklash)…can suffer as a result of default’ (Amev – UDC Finance Ltd –v- Austin [1986] 162 CLR 170, at 181, per Mason & Wilson JJ).

In determining whether or not a provision is penal rather than compensatory the test to be applied is ‘one of degree and will depend on a number of circumstances including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term. The Courts should not, however, be too ready to find the requisite degree of disproportion less they impinge on the parties’ freedom to settle for themselves the rights and liabilities following a breach of contract’ (ibid, per Mason & Wilson JJ at 193-194).

Nothing is advanced by the defendants as to the nature of the relationships between Sklash and Yarra Capital. All that appears from the evidence is that both are money lenders engaged in short term high risk financing. No vulnerability of Yarra Capital to oppression is demonstrated.

Accordingly I cannot conclude that there is any case to investigate, let alone that it is arguable, that the provision for default interest constitutes a penalty.

For these reasons I will give judgment for the plaintiff.

ANNUALISED “INTEREST” CHARGES

SCHEDULE A

DEED	PRINCIPAL	DAILY “INTEREST”	ANNUAL “INTEREST”	ANNUALISED “INTEREST” AS % OF PRINCIPAL
1^st Deed	$100,000	$328.50	$119,902.50	119.9025%
2^nd Deed	$65,000	$275.00	$100,375.00	154.42307%
3^rd Deed	$85,000	$350.00	$127,750.00	150.29411%
4^th Deed	$50,000	$250.00	$91,250.00	182.50%
5^th Deed	$25,000	$125.00	$45,625.00	182.50%
6^th Deed	$115,000	$450.00	$164,250.00	142.82608%

SCHEDULE B

DEED	PRINCIPAL	FEE	LOAN PERIOD (approx.)	ANNUAL “FEE” (approx.)	ANNUAL FEE AS % OF PRINCIPAL (approx.)
1^st Deed	$100,000	$20,000	2 months	$120,000	120%
2^nd Deed	$65,000	$10,000	3 months	$40,000	61.538%
3^rd Deed	$85,000	$12,500	4 months	$37,500	44.118%
4^th Deed	$50,000	$10,000	2 months	$60,000	120%
5^th Deed	$25,000	$10,000	2 months	$60,000	240%
6^th Deed	$115,000	$10,000	2 months	$60,000	52.17%

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Sklash Pty Ltd v Yarra Capital Group Pty Ltd [2004] VSC 385

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[2004] VSC 385

7 October 2004