Stormont v McKay
[2017] VCC 492
•3 May 2017
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
| GENERAL LIST |
Case No. CI-14-02287
| SALLY-ANNE STORMONT | Plaintiff |
| v | |
| JAMES EDWARD McKAY and JILLIAN MAREE McKAY | Defendants |
---
JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 28, 29 September and 11 October 2016, 27 February and 6 April 2017 | |
DATE OF JUDGMENT: | 3 May 2017 | |
CASE MAY BE CITED AS: | Stormont v McKay | |
MEDIUM NEUTRAL CITATION: | [2017] VCC 492 | |
REASONS FOR JUDGMENT
---
Subject: CONTRACT LAW
Catchwords: Loan contract; discrepancy between recitals as to total amount owing; whether constituting common or mutual mistake avoiding loan contract; errors in non-operative portions of agreement not sufficiently fundamental to avoid loan agreement; lender not making good her entire claim for principal and interest; agreement providing for election between transfer of shares and enforcement of loan agreement; lender elected to enforce loan agreement.
Legislation Cited: Electronic Transactions Act (Vic) 2000; Supreme Court Act(Vic) 1986
Cases Cited:Garcia v National Australia Bank Ltd (1998) 194 CLR 395; United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74; Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1
Judgment: (1) Within 14 days of this date, the plaintiff must bring in a minute of judgment to give effect the above reasons; (2) Costs reserved.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. Ritchie | MDM Lawyers |
For the First Defendant | Mr J. McKay, In Person |
HIS HONOUR:
Background
1 In the first decade of this millennium, a company known as 3G Global Management Pty Ltd was established to promote a scheme whereby 100 per cent access for downloading purposes would be granted to subscribers of mobile phone services for the first 14 days of the life of newly released popular music. The promoting company was known colloquially as 3GG. The vital step in establishing such a service is obtaining access to musical content by contracts with the leading recording companies. 3GG apparently had a contract which it had signed with Universal Music following exhaustive negotiation over a period of years.
2 3GG had raised the necessary shareholders’ capital and had obtained approval for bank funding. It was ready to launch its service when the Global Financial Crisis of late 2008 supervened, resulting in the banks cancelling their finance approval. This led to the demise of the scheme. Amongst those promoting 3GG was Mr McKay, who is the first defendant in this proceeding. (Transcript “T” 60-62)
3 Subsequently, Mr McKay established another company known as F1RST Mobile Pty Ltd (“F1RST Mobile”) which he intended as the vehicle to relaunch the 3GG venture. (Ibid) Arising out of a scheme to promote a unit development at 198 The Esplanade, Brighton, a property owned by Mr McKay and his wife, Mrs Jillian Maree McKay, the second defendant, the McKays entered into a series of transactions with the plaintiff, Mrs Sally-Anne Stormont. Mrs Stormont is the wife of Mr Anthony John Stormont, now semi-retired but having a background of work in the finance industry and later as a finance broker. (T54-55) Mr Stormont arranged the loan transactions on behalf of his wife. Mrs Stormont described herself as a retired teacher. She said she retired in 2005, has never been in the business of lending money and aside from the transactions with the McKays undertaken as executrix of her late father’s estate, derived income from a single rental property on which a newsagency business was conducted by an unconnected party. (T41, 42, 51) In 2005 approximately:
“…somebody that [Mr Stormont] had been doing some work with introduced him to, or told him about Mr McKay.” (T43, Line(s) (“L”)13-15)
4 This led Mrs Stormont to make loans to the McKays:
“… from money that [she] had invested.” (Ibid, L22-23)
5 Mrs Stormont as lender, the McKays as borrowers and a guarantor, Jedward Nominees Pty Ltd (“Jedward Nominees”), entered into a loan agreement dated 23 November 2007 whereby Mrs Stormont lent and the McKays borrowed the sum of $268,900. The loan agreement provided for a lower interest rate of 28.6 per cent per annum (being the equivalent of $210 per day) and 30 per cent per annum (being the equivalent of $221 per day). Repayment was to be made:
“… six months from the date the Advance is drawn-down by the Borrowers”.
6 The loan was to be secured by a second mortgage over the McKays’ property at 198 The Esplanade, Brighton, and by a lien over 3.5 million shares held by the guarantor, Jedward Nominees, in the capital of a company known as “Two Way Ltd”. The McKays executed a mortgage to secure this advance in the form of the Law Institute’s “Standard Fixed Mortgage (Interest Only)” which was subject to the terms and conditions in the Memorandum of Common Provisions retained by the Registrar of Titles number AA689. (Court Book (“CB”) 6A and 6B)
7 The same parties entered into a further loan agreement dated 18 December 2008 with respect to an advance of $75,000 repayable on 31 March 2009. This advance was subject to payment of:
“1.6 per cent per annum being the equivalent of $100 per month (sic) [presumably the reference should be to 1.6 per cent per month] and a higher rate of 48 per cent per annum, being the equivalent of $98.03 per day.”
8 This was secured by a third mortgage over the property at 198 The Esplanade, which was in the same Law Institute form as the previous one and was apparently held unregistered. (CB 11A and 11C)
9 Then there was a further loan agreement dated 21 December 2009 between the same parties, this time with respect to an advance of $90,000. The interest rate was expressed to be a lower rate of:
“5.34 per cent per annum being the equivalent of $400 per calendar month [again, presumably the reference should be 5.34 per cent per month] with a higher interest rate of 7.34 per cent per annum being the equivalent of $550 per calendar month [again the reference would appear to be appropriately per month, rather than per annum.]”
10 The advance was to be repaid on 30 April 2010. There was a further unregistered mortgage in the same Law Institute form. (CB 12A and 12B)
11 The same parties executed a further deed dated 6 June 2011, which deed is the subject of the present proceeding. The deed recited the 2007 and 2009 loan agreements relating to advances of $268,000 and $90,000 [the 2007 loan is expressed to be for $268,900]. Recitals B and C of the 2011 deed were as follows:
“BThat the parties hereto have hereinbefore agreed to and completed variations of the terms and conditions of the loan agreements and have capitalized the interest applicable thereon and extended the repayment dates.
CThat pursuant to the prior variations referred to in Recital B the parties hereto agree and acknowledge that the total loan funds advanced together with all interest and costs thereon capitalised therein is now the sum of $545,000.00 (‘the original loan funds’).”
12 Recital D acknowledged:
“DThat the sum of $545,000.00 is the principal sum owing by them as at 20 May 2011.”
13 Recital F provided:
“FThe Borrowers have requested further time to complete their repayment of the loan funds as designated in recital ‘D’ and also require additional cash flow funding while they await the sale of their development project at 198 The Esplanade, Brighton.”
14 The agreement provided for a further advance of $97,600, receipt of which was acknowledged by the borrowers. This advance was said to have been disbursed as follows:
“(a)$60,000.00 payment to the borrowers;
(b)$27,700.00 retained by the Lender representing payment of the May interest of $6,700.00 on the original loan funds together with late interest applicable to the May payment and a further advance to cover the lender[’]s interest on the original loan funds for the months of June, July and August 2011;
(c)$9,900.00 to be retained by the Lender to defray its costs and expenses in the procreation [sic] of the further loan advance.”
15 According to clause 3 of the loan agreement:
“3The original loan funds of $545,000.00 together with the further loan advance of $97,600.00, totalling $642,600.00, shall, subject to payout of the NAB’s first mortgage be due and payable by the Borrowers on the date of settlement of the real estate situate and known as Unit 2, 198 Esplanade, Brighton which is part of the security given by the Borrowers by way of second mortgage pursuant to the original loan agreement or the 20th September 2011 whichever occurs first.
In the event that repayment of the total loan funds of $642,600.00 does not occur as referred to above the Borrowers shall pay a default penalty interest rate of 20 per cent per annum on the total loan funds or on any part of the total loan funds then remaining outstanding calculated and accumulated daily.”
16 There was also provision for the payment of “bonus” to the lender “as a gesture of goodwill” based upon the achievement of certain prices for the sale of Units 1 and 2 at 198 The Esplanade, Brighton. It would seem the bonus payment never became payable. (CB 13)
17 Apparently, the amounts referred to in this loan agreement were not repaid by the McKays by the deadline of 20 September 2011 and the lender, Mrs Stormont, entered into an agreement dated 22 October 2012 with the McKays, Mr Stormont and Strathmore Securities Pty Ltd (“Strathmore”), a company controlled, it would seem, by the Stormonts. (CB 14) Recital A to this deed stated inter alia:
“In December 2007, the McKays entered into a loan agreement with Sally Ann Stormont (‘Stormont’) and over the years (with the last variation to the agreement in June 2011) various additional loans were made resulting in the facility today, totalling $728,200.00 which consists of $605,000.00 of principal and $123,000.00 of interest owed to August 21, 2012 (thereafter ‘the McKay Loan’). …”
18 Mr Stormont was said, according to Recital B, to be a party to the deed “for confidentially (sic) purposes only …”
19 According to Recital C, the whole of the sale proceeds of Apartment 2 at 198 The Esplanade was paid to the National Australia Bank as first mortgagee and Apartment 1 might: “only realise sufficient proceeds to satisfy the balance of NAB’s first mortgage. …” (Recital D)
20 According to Recital D, “The McKay Loan is overdue for repayment … “
21 According to Recital E, the McKays agreed to procure their son’s company, CMK Sports Pty Ltd, to transfer 5 per cent of its shareholding of one hundred $1 fully paid shares in the company F1RST Mobile Pty Ltd to Stormont “or her nominee” viz Strathmore, for the consideration of $5 on the basis that those shares “may provide additional security for [Mrs Stormont’s] loan to the McKays.” (Recital F)
22 According to Recital F, whilst any moneys continued to be owing by the McKays to Mrs Stormont, they would procure that in any:
“future allocation of additional shares in F1RST Mobile Pty Ltd that [Strathmore would] receive 5 per cent of the additional allocation …”
23 According to Recital H, the five shares and any additional shares allocated would be held by Mrs Stormont’s solicitors, MDM Lawyers (“MDM”), “in trust” and Strathmore and Stormont would not deal with the shares “in any way or have any voting rights other than as provided for in this agreement.” If there were no excess funds available from the remaining apartment at 198 The Esplanade [as apparently was the case], “the McKay loan balance remains as stated in this agreement accruing monthly interest…” (Recital I)
24 The agreement provided for the transfer of the five shares held by CMK Sports Pty Ltd in the capital of F1RST Mobile to Strathmore with the share scrip and transfer forms to be held by MDM. According to clause 6, Mrs Stormont and Strathmore were not to deal with the shares until 15 December 2012:
“… to give the McKays time (whether from the sale of the property [Apartment 1] or otherwise) to raise the money required to pay the balance of the Stormont loan.”
25 The shares were to be re-transferred if the McKays paid out their loan. If payment was not made by 15 December 2012:
“… then Stormont must attempt to sell sufficient of its F1RST shares … to re-pay to itself any balance then owing under the loan facility by the McKays but … the McKays shall continue to have the rights to repay the balance of the McKay loan and reclaim … the total number of shares or any balance of the shares …”
26 Stormont was obliged to sell the shares “at a fair market price having regard to the most recent, arm’s length sales of shares in F1RST Mobile.” Stormont agreed that she would:
“first approach the existing shareholders in F1RST Mobile … and … will afford the existing F1RST shareholders a 21 day period (exclusive of December 21, 2012 to January 7, 2013) to consider any price Stormont proposes for the sale of sufficient of Stormont’s F1RST shares to repay the McKay loan to itself.”
27 In making those approaches, Stormont and Strathmore agreed that they would “not divulge any information regarding the McKay loan facility or any related matters.” If this process did not yield monies to repay the McKay loan, Mrs Stormont was obliged to:
“… make all reasonable bone fide, arm’s length efforts to sell sufficient of [the] remaining shares at a fair market value to accommodate the balance of the McKay loan then owing to Stormont.”
Any surplus monies from the sale were to be returned to CMK Sports Pty Ltd or its nominee within seven working days and any unsold shares were to be returned to CMK Sports Pty Ltd “for $5”. If Mrs Stormont had made:
“… bone fide efforts to sell all or part of its F1RST Mobile shares sufficient to expunge the McKay loan [but] has been unsuccessful … then the McKays shall grant Stormont a further 3 months in order to sell sufficient of its shares at a fair market price to pay back to itself, the McKay loan. If following this further 3 month period, Stormont has still not sold sufficient of its shares to enable the McKay loan to be repaid then Stormont must elect to either keep the shares in F1RST Mobile and cancel out the McKay mortgage/debt, or sell back to CMK Sports Pty Ltd for the sum of $5 whatever number of [the] shares remain unsold in which latter event the balance of the McKay loan to Stormont will remain owing by the McKays to Stormont and Stormont shall be entitled to thereafter pursue its rights and entitlements for recovery against McKay of the McKay loan pursuant to the terms of this agreement …”
28 There was a provision for arbitration with respect to “any disputes relating to this further security agreement.” It was provided that “up until March 15, 2013, or such earlier or later date (unless Stormont acquires the Stormont shares … outright …) Stormont and [Strathmore] shall not be entitled to vote in matters of F1RST Mobile Pty Ltd … “
29 If Stormont retained the shares “outright and the McKays’ loan is accordingly discharged and released” then Stormont would have full voting rights. During the time in which the McKays were attempting to repay the loan or Stormont was attempting to sell the shares, she was to “make no attempts to enforce the mortgage or any other security” she might hold relative to the McKay loan. The parties were to cooperate with one another with the agreement “to be held in strict confidence by the parties.” Mr and Mrs Stormont specifically agreed “that they [would] not divulge any details concerning the McKays’ loan from Stormont to any other entity or individual …” and the Stormonts would not:
“directly or indirectly contact any of F1RST’s Management, Advisors, Associates, Suppliers, Investors, Clients or Directors other than James Edward McKay …”
30 The Stormonts also agreed not to contact any F1RST shareholders:
“save, if applicable, after the 15th December 2012 for the sole purpose of selling of the shares … or unless Stormont acquires outright ownership of the shares...”
31 There was a choice of Victorian law and submission to the jurisdiction of the Federal Court of Australia.
32 With no funds generated from the sale of the real estate security, Mr Stormont sought to recoup the loan by selling the shares in F1RST Mobile Pty Ltd. He said that in the events that occurred, Strathmore had five shares; CMK, a company controlled by Mr McKay’s son, had 90 shares; and a company controlled by Dr Edelsten, the high profile and controversial medical entrepreneur, held five shares. According to Mr Stormont, he approached Dr Edelsten through a Melbourne law firm who he understood was acting for him, namely Webb Korfiatis, and Mr Webb of that firm told him that Dr Edelsten was seeking to sell his shares as well; that is, he was not in the market to buy. Mr McKay sent an email to Mr Stormont in which he stated:
“CMK will not be a buyer, Edelsten is trying to sell his as you well know …” (CB 24Q)
33 Attempts to sell to existing shareholders were therefore unavailing. Mr McKay continued in his email:
“I have also said to you that if it came to a situation where you are trying to sell your shares under our agreement, that it might be worthwhile for you to approach some of the shareholders who are still listed in 3GGM. Your approach to these shareholders is not something which is in our agreement as a matter of right to you, but it is something which I would be prepared, in good faith, to facilitate, provided that your approach is a considered one and is done in cooperation with me.”
34 According to Mr McKay, some of the shareholders in 3GG were “naturally disappointed”. He continued: “Therefore, provided you agree to a controlled approach, under my guidance, then I am prepared” to visit the shareholders whom he described as “candidate shareholders”, with Mr Stormont needing to be guided by Mr McKay on any approach so that his:
“… understandable single-minded approach does not have the effect of damaging the whole project for everyone concerned, including yourself.”
35 Subject to Mr Stormont’s cooperation, Mr McKay said he was prepared:
“to introduce [Mr Stormont’s] name to them and to let them know that [Mr Stormont] will be in touch. That way, they will not be surprised when they hear from you and they will have at least some outline as to why you are calling. This will help you.”
36 When Mr Stormont made approaches to these additional potential purchasers – that is, participants in the abortive 3GG project, according to Mr Stormont “it wasn’t positive”. (T69, L30) Mr Stormont complained that as at the summer of 2013, [presumably January/February] he had no information about the business of F1RST Mobile. (T70, L24-31) Mr Stormont complained that despite numerous emails and conversations, he received no concrete information about the progress of F1RST Mobile beyond platitudes such as “things are going very well” and “we’ve had some very exciting meetings”. (T71, L4‑11) In an email dated 7 February, Mr McKay told Mr Stormont:
“So, from the point of view of F1RST Mobile Pty Ltd and its business activities, it has no obligation to report to you save as far as it may be required to periodically report to any other minor shareholders, but, in your case, there is the ‘conditional’ nature of the shares Dominic [the principal at MDM Lawyers] is currently holding in trust to be considered. But even putting all that aside, there is no way the management of any company I know would provide a 5 per cent shareholder with the extraordinary level of detail you requested in your below email. It just doesn’t happen. Even Board reports wouldn’t contain that level of detail and I am not going to entertain it. I have on many previous occasions told you that I cannot allow a personal debt between the McKay and Stormont interests to interfere with the interest of F1RST, a company which has no interest in the debt. Simply put, you have no right to request/demand that sort of information.” (CB 24R)
37 Mr Stormont made approaches to members of the Mantello family who had been involved in the 3GG project but to no avail. Mr Stormont sent an email to Mr McKay on 19 March 2013. (CB 24V) Mr Stormont complained that he was hobbled in his approach to the Mantellos. He said:
“…you expect me to sell the ‘shares’ without disclosing anything about F1RST … . So I can’t discuss the details.”
He continued:
“Our agreement states that I am only allowed to talk to F1RST shareholders. I have started to do that, and you went berserk. What is wrong with me talking to Edelsten for heaven’s sake, unless he knows something that I don’t and you don’t want me to find out.”
38 Mr Stormont said:
“Your problem may well be that you can’t sell your shares anywhere near that price and may have to sell more than 10 shares. Not my problem.
Anyway having gone back and forth, to and fro, et cetera you can sell our shares for the debt figure.
From today you have 88 days until June 15th 2013.”
39 Mr Harris was called as a witness by Mr McKay. He said that it was part of his duties, both for 3GG and F1RST Mobile at the relevant points in their development, to put together PowerPoint presentations for potential funders. (T131-132) He described a complete and comprehensive presentation was made in late November 2011 [Mr Stormont’s evidence quoted below suggests this date is incorrect] to a “Mr Nikolai” of an organisation known as “Pie Face”. This presentation was entirely comprehensive lasting several hours and took place at 198 The Esplanade, Brighton. It included a comprehensive set of projections as to the level of business which F1RST Mobile sought to achieve. (T133-135) It appears this was a reference to a Mr John Nicholas, who Mr Stormont described as follows:
“Mr John Nicholas, a friend of mine who is a high level business[man] in world banking.” (T159, L3-5)
40 Mr Stormont brought Mr Nicholas in to seek his assistance. (T161, L8-14) Mr Stormont sent an email to Mr Jeremy Mantello on 22 May 2013 in which he described his cooperation with Mr Nicholas and suggested a modification of the role of Mr McKay relative to F1RST Mobile. This company was Mr McKay’s creation and he was undertaking the responsibility of obtaining contracts with the music providers. In the email to Mr Mantello, Mr Stormont said of Mr McKay, “…he is not strong enough now to take these guys on himself.” (T158, L24-25)
41 Mr Stormont said his proposal was that Mr Nicholas be involved in fundraising, not making contracts with content providers. (T163, L17-20) Mr Stormont seemed willing, ultimately, to concede that his concern was not so much a lack of information about F1RST Mobile, which at all material times had not commenced trading and could make available no more than projections which it seems were in fact made available at a presentation for Mr Nicholas, but rather his concern was that, unlike 3GG, it never obtained any contracts with content providers. (T169)
42 By letter dated 11 June 2013 addressed to Mr and Mrs McKay at 1/198 The Esplanade, Brighton, MDM Lawyers (who it will be recalled were holding the five shares on behalf of Mr Stormont) stated:
“We refer to the abovementioned Agreement [that is the agreement relative to the shares] and as you are aware we act on behalf of Sally‑Anne Stormont of Strathmore Securities Pty Ltd, the first and second named parties of the agreement, as well as Anthony John Stormont, the fourth named party.
Pursuant to the agreement our clients have been unable to effect the Sale of the Shares provided by you through the agreement in order to recoup the McKay debt in full or part and we are now instructed in accordance with clause 6(viii) that our clients have decided not to retain the shares beyond the 15th June 2013 and will now return those five shares to CMK Sports Pty Ltd for the sum of $5 as therein provided.
We are currently preparing the transfer documents and these will be forwarded shortly.”
43 The letter was forwarded under cover of an email from Ms Mundy, secretary to Mr D’Ortenzio, a principal of MDM Lawyers. The email over the name of Mr D’Ortenzio, addressed to Mr McKay, said:
“Our clients have decided to return the CMK Sports Shares to you, pursuant to the terms of the agreement as a sale has not been able to be achieved. Letter to this effect attached. Regards, Domenic D’Ortenzio.”
44 This correspondence was followed up with a letter dated 13 June marked for hand delivery, once again addressed to Mr and Mrs McKay at 1/198 The Esplanade, Brighton, stating:
“Further to our letter of the 11th inst we now enclose herewith the following for your attention:-
1.Executed Share Transfer for the five shares held by Strathmore Securities Pty Ltd in F1rst Mobile Pty Ltd;
2.Share Script [sic] Certificate in respect of the five shares;
We confirm that the Transfer is in return of the shares to CMK Sports Pty Ltd as provided for in the agreement on the 22 October 2012.”
(CB 20 and 21)
45 The copy letter of 13 June has attached to it in the Court Book a copy of the Share Certificate for the five shares but no executed transfer. Mr Stormont said that he delivered this letter himself. According to Mr Stormont, the letter included the executed transfer. (T78)
46 MDM Lawyers wrote to Mr and Mrs McKay, this time at Suite 307, 127 Beach Street, Port Melbourne. The letter dated 21 August 2013 rehearsed the history of the matter and continued:
“Our clients’ rights and entitlement to pursue the recovery of the outstanding principal and accrued interest thereon, remain and have never been abrogated. Now, upon the termination of the additional security agreement of the 22nd October 2012, we are instructed to attend to the recovery process against you.
Therefore, we now demand on behalf of our client the repayment of the outstanding principal and accrued interest which is calculated at principal $642,600 pursuant to the Agreement of 6th June 2011 and interest thereon at the rate of 20 per cent p.a. ($352.11 per day) to 31st July 2013, $270,068.37, a total of $912,668.37. Interest continues to accrue at the daily rate.
Our clients require the repayment of the outstanding debt in full within the next 30 days or at least compromise arrangements suitable to our client for the debt to be repaid and failing such payment, or satisfactory agreement between the parties, we have their instructions to issue proceedings for the recovery of the outstanding debt without further notice.” (CB 23)
The present proceeding
47 MDM filed the Writ commencing this proceeding in court on 12 May 2014. (CB 1) Under her Further Amended Statement of Claim dated 11 February 2016, Mrs Stormont claimed against the defendants $1,184,844.20 plus interest pursuant to the 2011 agreement, “from 9 December 2015 until payment or judgment” and costs.
48 By his Further Amended Defence dated 5 September 2016, Mr McKay did not admit the plaintiff’s claim, “because an earlier original document (‘the 2007 Loan’) is the governing loan document and not the 2011 Deed”: He referred to “smaller loan documents” between 2007 and 2011:
“which involved other guarantors and remedies which the Plaintiff could have availed itself of. Within this chain of loan documents the name of the lender is not always consistent with the name of the plaintiff as stated in the current Further Amended Statement of Claim.”
He said that the:
“ very high interest rates imposed by the Plaintiff were unconscionable and given that various of the loan documents were secured by property that the Plaintiff breached the conditions of s39 of the Consumer Credit (Vic). As such various of the loan documents including the original 2007 Loan document may be invalid and/or unenforceable and at the least will lead to significant reductions in the amounts of interest being claimed by the Plaintiff. The overall monetary claim by the Plaintiff would, if a s39 breach is upheld by the Court, be significantly less.”
49 He said, further, that by the operation of the 2012 deed with the transfer of shares, “no funds are liable to be repaid by the Defendants to the Plaintiff.”
50 In her defence, Mrs McKay adopted the defences advanced by her husband and said further that the details of the sums advanced in the provisions were not explained to her by Mrs Stormont’s representative, her husband, Mr Stormont. If she had had sufficient knowledge or understanding, according to Mrs McKay:
“I would never have signed the agreements and never would have consented to them.”
She relied upon the doctrine exemplified in the decision of the High Court of Australia in Garcia v National Australia Bank Ltd (1998) 194 CLR 395.
51 When the trial was called on before me, Mrs McKay was neither present nor represented. Mr McKay handed up material from her treating general practitioner and a clinical psychologist to the effect that, as a result of a stroke, she was unfit to defend herself in the proceeding, unable to attend and her prognosis did not indicate any likely improvement in her condition. In those circumstances, for reasons which I then gave, I ruled that it would be inappropriate for the claim against her to proceed at trial.
52 The plaintiff’s counsel then elected to press on against Mr McKay alone.
53 The trial proceeded over a number of days in September and October 2016. Representing himself, Mr McKay relied on the matters set out in his Notice of Defence, but also raised two related but unpleaded matters.
54 First, he said that he had made a repayment of principal of $75,000, which was not allowed for in the plaintiff’s claim or perhaps in the Recitals to the 2011 deed, which sought to consolidate previous borrowings by the defendant from the plaintiff.
55 A further problem which was raised by Mr McKay and also by me was that, whilst the 2011 deed included a Recital D to the effect that the McKays owed Mrs Stormont $545,000 of principal as at 20 May 2011, the underlying loan agreements did not seem to add up to that sum of money. It, and the figure of $642,600 which included a further advance of $97,600, arithmetically did not represent the correct outstanding figure, it seemed.
56 The trial was still incomplete and needed to be adjourned to 27 February 2017. I directed that before the resumed trial date in February 2017, Mr McKay should file and serve the material which he said supported his contention that he had made a $75,000 principal repayment for which he and his wife were not credited in the plaintiff’s claim and directed that he be at liberty to contend as he wished to do, that the 2011 deed was void for common mistake without the necessity of his filing any pleading to that effect. I gave the plaintiff liberty to file amended pleadings, raising an application for rectification of the 2011 loan agreement with the evidence in support to be by written statement.
57 By 27 February 2017 and within the time limit by my directions, Mr McKay produced evidence of a payment of $75,000 to Mrs Stormont in the form of a cheque butt for a cheque in favour of Mrs Stormont dated 23 April 2009. The payment of $75,000 was therefore established but plainly it was made before the parties entered into the 2011 loan agreement.
58 Mrs Stormont’s solicitors sought a short extension of time for the filing of their material to which Mr McKay consented. Eventually, a number of affidavits were filed and a number of draft pleadings were exchanged. Ultimately, the final version of what the plaintiff wanted to contend was not filed with the court and served on Mr McKay until mid-afternoon, 24 February 2017 – that is, Friday afternoon before a scheduled Monday resumption of the trial.
59 Perhaps unsurprisingly, Mr McKay objected to this course of action which he said deprived him of the opportunity of investigating his own records to test the correctness of the assertions ultimately made by the plaintiff in the final version of her material.
60 Reluctantly, in light of the already fragmented and prolonged trial which had taken place, I granted Mr McKay an adjournment to enable him to make further investigations.
61 Mrs Stormont swore affidavits on 10 February, 14 February and 27 February 2017 (the material emailed on the previous Friday, 24 February had been unsworn). In these affidavits, Mrs Stormont first conceded that a payment of $75,000 had indeed been made by Mr McKay in 2009. Next, she said that a further $57,000 advance had been made to Mr McKay at his request made in March 2010. It was added to “Loan B”, which was previously $50,000. The advances she said were made on 12 April 2010 of $25,000 and on 14 April 2010 of $32,000, to Mr McKay. She referred to an email from Mr McKay to her husband dated 23 May 2010 which described it as “Loan C - $57,000 on 14.4.2010 due for repayment on 15.4.2010 (over laps Loan B in that Loan B was current when Loan C was provided)”. Mr McKay referred to various charges, establishment fees and so forth and the equivalent of $1,500 per month in interest or an interest rate of 31.6% per annum.
62 Next, she referred to a further loan of $120,000, the terms of which were set out in an email from Mr Stormont (her husband) to Mr McKay of 24 May 2010. It was exhibited as “SAS-5”. This referred to a total advance of $120,000 with funds of $75,000 available following the withholding of “fees, costs and charges to various parties … $45,000. Paid up front and included as part of the principal advance.”
63 Mr Stormont referred in the email to the difficulties with the Brighton Residential Development which led to the requirement for further finance, commenting “It’s just the interminable hassle with delays, insurance claims, unavailable tradesmen, cost overruns, the list goes on”. Mr Stormont said:
“I will put this deal to my wife and ask her to consider it. It is set out as follows, but is not a frim [sic scil firm] offer. She may yet decide not to advance anymore.”
64 The affidavit stated that this loan advance was made in two tranches of $60,000 each on 27 May 2010 and 3 [scil 31] May 2010. She produced an Estate Cash Management Account for the Estate of her late father of which she was Executrix. (SAS-6)
65 When these matters were allowed for, according to Mrs Stormont, the outstanding items were as follows as at the date of the 2011 deed:
Loan A - $268,000
Loan B - $90,000
Loan C - $57,000
Loan D - $120,000
Total = $535,000
66 She noted that only Loans A and B were recited in the preamble to the 2011 loan agreement stating:
“The other loans are not referred to as I and my husband Anthony Stormont omitted to instruct our Solicitors that they had in fact been made, so that they could be identified in the 2011 Deed, only instructing the Solicitors of the total of the loans as $535,000. This was because we treated the subsequent advances of $57,000 and $120,000 as additions to the original Loan B of $90,000. As our Solicitors were unaware of the breakup of all the loans only two were referred to and assumed that the balance to arrive at $535,000 would be arrears of unpaid interest.”
67 In fact, as previously noted, the 2011 loan agreement refers to the balance as $545,000 not $535,000, as calculated in Mrs Stormont’s affidavit of 10 February.
68 Mrs Stormont then swore a further affidavit on 14 February, adding a further document relative to the $120,000 loan which she said had been made to Mr McKay. This was marked as SAS-7 and was a bank statement for an account in the name of the Estate of [the late] Murray Dunstan Hicks, designated as “Cash Management Account Investor Option”. It showed withdrawals by way of internet online banking of $60,000 on 27 May and $60,000 on 28 May, both with descriptor “Loan D McKay”. She said the reference to “D McKay” was a “typing error made by Westpac [Bank]. The reference should have indicated ‘J McKay’.”
69 In the third affidavit sworn 27 February 2017, Mrs Stormont conceded that the figure in the 2011 loan agreement was $545,000 not $535,000, as she had stated in her previous affidavit. This had the consequence that the figures in the 2011 loan agreement are, if one accepts the totality of Mrs Stormont’s affidavit evidence, still incorrect. She also said that upon her further investigation the loan made on 23 November 2007 was $268,900 rather than $268,000. She said, “The same error is made in recital A of the 2011 Deed”. The total then was $535,900, not the $545,000 stated in the loan agreement of 2011.
70 As to the discrepancy between these figures and the $545,000 referred to in the 2011 deed, she said:
“I am now … unable to remember but I think it likely that it was an agreed amount of interest on the $57,000 loan … the 2011 Deed, I think, was based on the assumption that interest repayments had been met by the McKays on both the $268,900 loan and the $90,000 loan up until 20 May 2011.”
71 Therefore, she said, the $545,000 figure in the 2011 loan agreement “was not a mistake”.
72 Aside from any other issues that might be taken with the narrative appearing in Mrs Stormont’s affidavit, there remained the problem of the $120,000 loan which, she said, formed part of the advances consolidated in the 2011 loan agreement and had been proposed on the basis that some $45,000 would be retained by her to cover a miscellany of fees and charges leaving a net advance of $75,000 only. Yet the bank records, which she relied upon to prove the making of the advance, showed the entire $120,000 being made available to Mr McKay.
73 Mr Stormont, in the course of his re-examination, explained this apparent inconsistency as follows:
“Well, in further discussing this now, it's coming back to me that Mr McKay was under a lot of pressure from both us obviously, when we were getting paid, and the bank to get this project finished. He did have a lot of bad luck with it, but bad timing is part of it, and the 75 I believe wasn't going to be enough. He needed the full amount that we'd proposed to lend - the 120, and so I explained that to my wife. I said - well, in fact to Sally and said this is what he needed, and because he had to get the building finished and get the builder to sign off and give him a certificate of occupancy - he hasn't got that, he can't sell it.
…he's sitting out and we're owed all this money, and the whole thing is wrapped up in the building and it's in Mr McKay's interests and certainly our interests that he got it completed and sold while the market was still strong. So really, we were hopeful that he could do it quickly.
… He needed more money and he didn't like the loan that we'd put to him, and he said that this is the last bit, I think I can get it over the line, I'm - look, I'm - it's a long time ago but he was desperate to get the thing finished, get the certificate of occupancy, put a marketing campaign in and sell the thing, pay everybody out. That was the plan.” (T336, L1-29)
74 This narrative carried with it the conclusion that, aside from interest that might have been levied under the consolidated 2011 loan agreement, this $120,000 loan advance was made interest-free.
75 Mr Ritchie, on behalf of the plaintiff, then completed his cross-examination of Mr McKay. He took him to an email which he sent to Mr Stormont and which was exhibited to Mrs Stormont’s 10 February affidavit, which acknowledged the existence of the $57,000 loan. He took him to the 2011 loan agreement, itself, and the 2012 deed referred to above, which sought to recoup McKay’s liability to Mrs Stormont by transfer of five shares in a company known as F1RST Mobile Pty Ltd. This deed is referred to in [17ff] above and its provisions are there summarised.
76 He took Mr McKay to a log of interest repayments which Mr McKay had produced earlier in the trial. I had not accepted it as an exhibit on behalf of Mr McKay because it was not produced in the ordinary course of business and was, as far as he was concerned, self-serving. Mr Ritchie tendered it to prove that in the period 20 September 2011 to 20 December 2011, Mr McKay made interest payments totalling $10,700 per month and this represented interest at the rate of 20 per cent per annum of a figure of $728,000 representing the capitalised amount outstanding under the 2011 loan agreement.
77 He also took Mr McKay to email exchanges which demonstrated, as Mr McKay conceded, that the 2012 deed, the first draft of which had been prepared by Mr McKay and his solicitor Mr Quinn, likewise adopted as correct the principal sum figure of $728,000 which, in Recital A to the 2012 deed was accepted as the amount outstanding and owing by the McKays to Mrs Stormont, subject to verification by an auditor.
78 Mr Ritchie tendered the loan interest repayment log as a plaintiff’s exhibit, treating it as an admission by Mr McKay. I admitted it into evidence but it was incorrectly designated as defendant’s Exhibit 11.
79 Mr McKay said that, since the plaintiff’s material had been served upon him late, he had been deprived of the opportunity to search his own records for a response to the allegation that a further advance of $120,000 had been made in May 2010. He raised a number of issues, suggesting that Mrs Stormont’s evidence in this regard was improbable but said he should have the opportunity to search his own records. I put to him that, given his case was that no $120,000 advance had been made, if that were correct, by definition, he would find nothing in his records. Nevertheless, reluctantly, I adjourned the matter over again until April directing that any material upon which he relied should be filed and served by 27 March 2017.
80 When the matter eventually returned on 6 April 2017, following a further delay of a few days as a result of an injury to Mr McKay’s foot, Mrs Stormont had filed and served yet a further affidavit. She said that following investigations with her bank, Westpac Banking Corporation, the payee on the two $60,000 remittance slips was Active Sports Marketing Pty Ltd (“Active”).
81 Mr Ritchie was permitted to recall Mr Stormont to give further evidence. He was referred to the evidence from his wife and asked why the two tranches of $60,000 were paid to Active. He replied “I was instructed to [by] Jim McKay”. (T398, L31 – T399, L2)
82 Mr McKay said that since Active had been placed successively in administration and liquidation, he would not have direct access to its banking records. He had spoken to the liquidator who, as a matter of goodwill, had agreed to assist. But, as of the final day of the hearing, he had not been able to access Active’s banking records for the relevant period. (T390, L1, - T391, L20) Mr McKay did not, however, seek any further adjournment and the matter proceeded to final submissions.
Defendant’s submissions
83 In his closing submissions, Mr McKay did not seek to rely on his claims based on interest rates limits in the Consumer Credit (Victoria) Act referred to at [48] above. (T420, L19-22 – T445, L6-14)
84 Mr McKay urged me to reject the evidence of the Stormonts as to the undocumented $120,000 advance. He said:
“…it’s extraordinary in this case because every other loan of any description that was made by Mr Stormont [sic] to my wife and I, was covered in quite some detail. And yet here is a situation where [$120,000 and there’s just nothing] … the largest loan.” (T402, L20-26)
85 He rejected any suggestion that the circumstances affecting him and his wife in 2010 raised such an exigency that documentation would be dispensed with. He noted that they kept making interest payments until 2012. (T403)
86 According to Mr McKay, the effect of the agreement made on 22 October 2012, and the events that occurred, was that Mrs Stormont had failed to elect to sell back the relevant shares in F1RST Mobile to CMK Sports Pty Ltd and, as a result, had elected to keep those shares and “cancel out the McKay mortgage/debt”. He submitted that this result followed automatically if Stormont did not take action to “sell back” the shares by 15 June 2013 which, according to Mr McKay, should be treated as a true deadline for these purposes.
87 As to the unaccounted for $9,900, Mr McKay contended that Mrs Stormont should be regarded as simply having failed to prove her case.
88 As to the various matters relied on by Mrs Stormont as constituting an election to retain her rights as lender rather than taking the shares in full satisfaction, he said insofar as Mr Stormont delivered a letter from MDM Lawyers to Apartment 1, 198 The Esplanade, Brighton, this was ineffective as an election to keep the loans alive and relinquish the shares. (T77, L26 – T78, L20, CB 21)
89 Mr McKay said that he had sold this property on 24 December 2012 and had provided a copy of the sale contract to Mr Stormont. (T412, L30-31) Accordingly, to Mr Stormont’s knowledge, according to Mr McKay, this was not an effective or proper address to serve notices on Mr Stormont. At the same period, Mr Stormont said he handed copies of this material to Mr McKay in person at a coffee shop in Leake Street, Essendon. According to Mr Stormont, he complained of a lack of reply from Mr McKay, remarking “So I gave him the whole shebang again, the three documents again”. (T79, L1-14)
90 According to Mr McKay, this never happened. He said “And I supplied evidence about any meetings that we did have at the coffee shop in Leake Street, Essendon - and it was nowhere near that time frame. So that couldn’t have happened.” (T414, L4-15)
91 Mr McKay asked rhetorically why was no receipt obtained following this exchange. A letter from Mrs Stormont’s solicitors dated 7 August 2013 was, according to Mr McKay, ineffective as an election because it was addressed to an obsolete address for him and his wife, namely, Apartment 307, 127 Beach Street, Port Melbourne. And, in any event, being dated in August was too late. (T414, L18-31)
92 He submitted that all of the uncertainty as to the proper figures for the loans was indicative of the existence of a common mistake.
Plaintiff’s submissions
93 On behalf of the plaintiff, Mr Ritchie contended that the evidence of Mrs Stormont made good the plaintiff’s claim when one allowed for the loans of $57,000 and $120,000, which were not referred to in the Recitals to the 2011 deed. He submitted that I should accept Mrs Stormont’s evidence in her affidavit of 24 February 2017 that the $9,100 balance unaccounted for between the figure $535,900 and $545,000 was “an agreed amount of interest on the $57,000 loan”. The existence of this loan was acknowledged by Mr McKay in an email to Mr Stormont of 23 May 2010. (Exhibit SAS4 to Mrs Stormont’s affidavit of 10 February 2017).
94 In those circumstances, submitted Mr Ritchie, whilst the Recitals in the 2011 agreement did not adequately explain the total outstanding principal amount of $545,000, that amount should, nevertheless, be regarded as correct. Since the Recitals were not operative provisions, they could not give rise to any “mistake” such as would in law avoid the operation of the agreement.
95 Mr Ritchie, on behalf of Mrs Stormont, submitted that the evidence of Mrs Stormont as to the makeup of the principal sum of $545,000 was accurate and should be accepted. He said the only amount for which no clear documentation was available, apart from banking records, was the $120,000 advance remitted to Active. He submitted that the figure of $642,600 should be accepted because the evidence showed payment of interest at the rate of $10,700 per month for the six months from 20 September 2011 to 20 March 2012, indicating an acceptance by the McKays that the figures shown in the 2011 agreement were the correct loan amounts. (T425, L1-6)
96 According to Mr Ritchie, the plaintiff should have judgment for the full amount, as set out in the 2011 agreement, with simple interest accruing from 20 March 2012 to the date of judgment.
97 Mr Ritchie submitted that the date 15 June 2013 was significant only as a date after which an election was required to be made by Mrs Stormont. It was not, he submitted, a deadline. Mrs Stormont had a reasonable time thereafter in which to make her election. In any event, he submitted, MDM Lawyers had emailed a letter to Mr and Mrs McKay stating that they had been unable to sell the shares and recoup the debts owed by the McKays and, accordingly:
“We are now instructed in accordance with clause 6(viii) that our clients have decided not to return the shares beyond the 15th June 2013 and will now return those five shares to CMK Sports Pty Ltd for the sum of $5 as therein provided.” (CB 20-21)
98 This letter was attached to an email transmitted from the offices of MDM Lawyers to Mr McKay at the address [email protected], expressed to have been transmitted at 4.21pm on 11 June 2013. This, submitted Mr Ritchie, was an effective election.
Conclusions
99 The first and most important question is whether, by operation of the 2012 agreement and in the events that have occurred, Mrs Stormont is to be regarded as having surrendered her rights as lender in exchange for the five shares in F1RST Mobile. As Exhibit A shows, F1RST Mobile was struck off on 24 February 2014. Since the company then ceased to exist, the shares have effectively ceased to exist. If Mr McKay is correct, Mrs Stormont has made a very poor bargain indeed.
100 The broad operation of clause 6(xiii) of the 2012 agreement seems relatively plain. The circumstances which eventuated were far from surprising. Nevertheless, the legal operation of the clause in the circumstances proves surprisingly difficult to determine. It is perhaps another example of the law’s endless capacity to throw up imponderable problems, even after so many authoritative pronouncements by appellate and superior courts on the operation of commercial contracts in so many permutations and combinations.
101 Mr McKay approached the operation of this clause in the same way as one might the exercise of an option to renew a lease or purchase a piece of real estate. He identified a particular time limit, namely, 15 June 2013. According to his analysis, Mrs Stormont either proved that she had, on or before that date, elected to enforce her rights as lender and relinquished the shares, or she was deemed to have elected to take the shares and her right to enforce the loan arrangements was forever barred or, perhaps, extinguished. He did not mention the analogy of an option to purchase land or to renew a real estate lease, though that type of analysis was clearly in his mind.
102 The reason that dates in options are treated in this way was explained by Lord Denning MR in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74, 81, where his Lordship said:
“In point of legal analysis, the grant of an option in such cases,is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer.” (See United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, 928-9 per Lord Diplock)
See also BS Stillwell & Co Pty Ltd v Budget Rent-A-Car System Pty Ltd [1990] VR 589)
103 Clause 6(xiii) of the 2012 agreement is not a provision of that character and so this approach to its construction is not appropriate. More fundamentally, Mr McKay’s analysis proceeded upon a textual misconception. The provision for election appears on the wording of the clause to arrive not before 15 June 2013 but “following [the] further three month period” – that is, after 15 June 2015. The clause says nothing about the period after 15 June 2013 within which the election must be made.
104 Were Mr McKay’s analysis of the operation of the sub-clause correct, I would conclude that Mrs Stormont had made an effective election to maintain her rights as lender and abandon the shares in F1RST Mobile by reason of a letter dated 11 June 2013 sent on her behalf to Mr and Mrs McKay to that effect.
105 Mr McKay noted that this letter was addressed to him and his wife at 1/198 The Esplanade, Brighton, which he said, by that time, stood vacant following its sale on the previous Christmas Eve. Since the letter was forwarded by email on 11 June 2013 to an address which the record shows was Mr McKay’s email address, that challenge to its effectiveness must be rejected.
106 In his closing submissions, Mr McKay said there was no acknowledgement of receipt or anything of that sort. On the other hand, I did not understand that Mr McKay made a distinct denial of receipt.
107 Mr Ritchie said he did not ask Mr McKay whether he had received that email or not.
108 Since there seems to be no question that all the other emails, to which I have referred and from some of which I have quoted, arrived, I see no reason to doubt that this email had been received.
109 Mr Ritchie referred to s7 of the Electronic Transactions Act (Vic) 2000. Section 7(1) provides:
“For the purposes of a law of this jurisdiction, a transaction is not invalid because it took place wholly or partly by means of one or more electronic communications.”
110 The word “transaction” is defined in ss(3) to include:
“…
(b) any statement, declaration, demand, notice or request, including an offer and the acceptance of an offer, that the parties are required to make or choose to make in connection with the formation or performance of a contract, agreement or other arrangement; and
…”
111 In my view, this emailed communication is in all respects an effective means of making the election under clause 6(xiii) save for the fact that it appears to have been premature. Again, I accept the contention that the hand delivery of the letter which was emailed was not an effective making of the election because it was communicated to an address which was no longer the McKays’ residence, a matter which Mr Stormont ought to have been aware of having, according to Mr McKay’s evidence, been provided with a copy of the contract of sale.
112 An effective election could only be made after, or perhaps, on 15 June.
113 Following his delivery of the material to Mr and Mrs McKay at the address in Brighton, Mr Stormont said that he:
“changed [his] modus operandi and made him [viz Mr McKay] come to me, instead of me coming to him. … We had coffee and a chat, we talked about what was – it was quite an amiable meeting. And I said, ‘Well, we sent the share stuff – share certificates and what have you, but you never replied, and you don’t reply to anything anymore’. So I gave him the whole shebang again, the three documents again…And, [I said] ‘I can have my $5 back, please?’.” (T79, L5-16)
114 Mr Stormont’s account said that this was not June. Therefore, it was a date after 15 June and therefore, if these events occurred, there would appear to have been a clear election made on behalf of Mrs Stormont and communicated to the McKays. In the circumstances, given that Mr McKay upon the evidence was the person engaging in the negotiations, I believe handing a letter addressed to Mr and Mrs McKay to him would be an effective notice of the making of an election as regards both of them. Mr Stormont said he thought this meeting took place in ”springtime”. When, as here, no particular date is stipulated for an event to occur or a right to be exercised, the law generally regards the relevant contract as requiring that the thing be done or the right be exercised within a reasonable time. (Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1, 13 per Dixon J.) In my view the making of an election in the spring of 2013 would entail its being made within a reasonable time. There was no evidence of any action taken by Mrs Stormont after 15 June inconsistent with an election to choose her rights as lender to the exclusion of the shares.
115 Mr McKay denied that the exchange described occurred as described by Mr Stormont. I prefer the evidence of Mr Stormont. Mr McKay alleged, despite all documentary evidence to the contrary, that F1RST Mobile Pty Ltd did not have the very small shareholding which the narrative indicates that it did, is therefore with limited number of other shareholders to whom the five shares, that were the subject of the 2013 agreement, could be offered. He contended that there was a much wider shareholding broadly reflecting the shareholding structure of the earlier company, 3GG. He called a Mr GD Harris as a witness. He put to Mr Harris that he was the general manager of F1RST Mobile Pty Ltd and that his involvement with that company and 3GG lasted from 2017 “till pretty much today”, viz 29 September 2016, the day on which the evidence was given.
116 Under cross-examination by Mr Ritchie, Mr Harris said that it came to him “as a complete surprise” that F1RST Mobile had been deregistered on 24 February 2014. Again, Mr Harris said, “At some point, the 3GGM and shareholders were rolled into F1RST Mobile as I understand it.” (T140, L23‑25)
117 Mr McKay returned to this theme in his closing address. He handed up a document which was supportive of his view of a much wider shareholding for F1RST Mobile. This document did not include an Australian Company Number. However, it showed the date of registration of the company as 6 June 2014. This could not have been the company referred to in the 2013 agreement, which is ACN 153 521 674. (T462, L14-20)
118 This plain error on Mr McKay’s part indicates that his recollection of the events of 2013/2014 is radically defective. He appears to have forgotten the abandonment of F1RST Mobile Pty Ltd ACN 153 521 674 with its being deregistered and the launch of yet a third company in June 2014 to attempt to exploit the commercial opportunity which he saw in making music downloads on mobile phones. Mr McKay produced evidence of a meeting between himself and Mr Stormont in December 2012 at the coffee shop. (Exhibit 9) But, to prove the parties met in late 2012 at this venue does not prove they did not meet there in late 2013 as well. Accordingly, I prefer Mr Stormont’s account in which he had a springtime meeting in a coffee shop with Mr McKay and handed him the letter of 11 June and its enclosures to Mr McKay’s denial.
119 Immediately before the first lengthy break in the trial, Mr McKay raised the issue of mistake for the first time. He had not pleaded any defence of mistake in his defence. I directed that he be entitled to raise a defence of common mistake rendering the loan contract void. The mistake to which he drew attention was the evident fact that the previous loans recited in the Deed of Loan Agreement dated 6 June 2011 did not add up to the total of $545,000 recited as being “the principal sum owing by [the borrowers, Mr and Mrs McKay] as at 20th May 2011”. (Recital D, CB 13) This led to Mrs Stormont filing a series of affidavits and producing documents, the ultimate effect of which was that, if her evidence were accepted, it provided an explanation for all of the $545,000 with the exception of some $9,900 which she believed, but could not swear, was likely to be capitalised interest. In particular, she said that there were two loans outstanding as at the date of the 2011 Deed of Loan Agreement which were not recited, one being for $57,000, the existence of which was admitted in an email from Mr McKay, and a further advance of $120,000 for which there was no inter partes documentation. Ultimately, she did produce banking records indicating that two tranches of $60,000 were remitted to the bank account of the company known as Active Sports Marketing Pty Ltd, which it is common ground was a company controlled by Mr McKay. Mr Stormont gave an account, which is recited above, explaining how, according to his recollection, the funds were made available without the holdbacks and deductions for prepaid interest and charges which would otherwise have been made because of the need for emergency funds to complete the Brighton real estate development which the McKays hoped would fund their repayment of their obligations to Mrs Stormont. Mr McKay drew attention to the lack of proper documentation, or indeed any documentation. He said given that this was so large an advance, it was implausible to suppose that such a loan had been made without any agreement at all or even exchange of emails. Mr McKay did not distinctly deny the existence of this $120,000 loan. Rather, he said he could not remember its existence and invited me to find that no such loan was ever made.
120 The points urged by Mr McKay, while being sceptical as to the existence of this advance, are persuasive. Nevertheless, ultimately I accept the evidence of Mr and Mrs Stormont that the $120,000 advance was made. The following considerations lead me to that conclusion. First, I generally prefer the reliability of Mr and Mrs Stormont’s recollection to that of Mr McKay. I have already drawn attention to his persistence in confusing the shareholding structures of two separate companies, the shareholding structure of one of which was crucial to his primary defence in this proceeding. Secondly, as Mr Ritchie brought out in cross-examination, Mr and Mrs McKay made payments of interest under the 2011 deed until March 2012. These payments were calculated by reference to the principal sum in that deed and the interest rate stipulated. Those calculations are based upon the pre-existing principal of $545,000. In his closing address, Mr McKay said that he came to Mr and Mrs Stormont as lenders of last resort in the hope of completing his property development. In these dire circumstances, it is unlikely that, as an experienced businessman, he would have made the mistake of substantially overpaying his interest instalments when the relevant loan advances had been made or not made in the relatively recent past.
121 Thirdly, Mr McKay was involved in the drafting of the 2011 deed. In an email dated 6 June 2011 to Mr Stormont (Exhibit F), he suggested that a recital to the deed read:
“The Guarantor hereby agrees and acknowledge[s] that its guarantee given pursuant to the original loan agreements now extends to the sum of $545,000 as at 20th May 2011”.
He suggested that clause 3 should read:
“The original loan funds of $545,000 together with the further loan advance of $96,700, Total $641,700 shall, subject to payout of the NAB’s first mortgage, be due and payable by the Borrowers …”
Mr McKay sent an email to the Stormont’s solicitors dated 3 June 2011 stating:
“Here is the revised document that we need to have done. Can you check with Dom about it and let me know when I can have it please. I need to transfer funds on Monday at the latest or before if at all possible. If I could have a document today it would be really great. I talk in person soon.” (Exhibit E)
122 I generally accept the evidence of Mr and Mrs Stormont as to the makeup of the relevant advances and their existence. Nevertheless, since they do not provide a clear explanation of some $9,100, I believe I should proceed upon the basis that the existence of this portion of the loan has not been proven.
123 On the basis of these findings, what operation does the doctrine of mistake have? Unsurprisingly, Mr McKay referred me to no authorities on the subject. Neither did Mr Ritchie, contenting himself with the argument that there was no common mistake such as the law would regard as sufficient to render the loan agreement void. Stating the general principles on the subject of mistake, Professor Carter, in his work Carter on Contract [22-140] 52,171 says:
“(1)The fundamental question of contract law is ‘What did the promisor really promise?’ and where the mistake relates to the subject matter of the contract a conclusion that the contract is void cannot be made if, as a matter of construction or implication, one party promised that the subject matter existed or possessed some attribute.
(2)Although in practice rare, where both parties make the same mistake, and the mistake is ‘fundamental’, there is authority for the proposition that a contract may be void for common mistake, unless the party who asserts the mistake was seriously at fault.
(3)Fundamental mistake rendering a contract void does not give rise to rights of compensation but may justify a claim for restitution, subject to the requirement of restitutio in integrum, where applicable.”
124 The last proposition would suggest that, even if the doctrine of mistake rendered the loan contract void, to restore the parties to the positions in which they were before the contract was made, it would seem necessary for Mr McKay at least to repay the principal. His argument, as I understood it, was that if the doctrine of mistake operated, he would be relieved of all liability. Upon the findings I have made, the parties were mistaken; first, as to the adequacy of the Recitals in giving a history of their previous loan arrangement, and, secondly, as to the sum of $9,100 which is not accounted for at all. Common mistake avoids contracts only if the mistake is “fundamental”. I accept the submission of Mr Ritchie that a failure fully and accurately to recite the true state of accounts between the parties in the Recitals to the deed, that is, in parts of the deed which do not themselves create any rights or obligations between the parties, is not fundamental. The sort of mistakes which are potentially fundamental, as analysed in Professor Carter’s work, are, for instance, the sale of specific goods which have ceased to exist [22-150] and mistakes as to the quality of the subject matter of a contract [22-190]. The mistakes in the Recital are significant and material, but are not, in my view, of the fundamental type which could render a contract void. Again, a fundamental common mistake between the parties could give a party an entitlement to rescind a contract. (Carter op cit [22-240]) But, as Professor Carter states, in law the mistake would need to be fundamental and, upon the rescission of the contract, restitutio in integrum would be required. That is, at least the principal would have to be repaid by Mr McKay and he might be liable for interest under s58 of the Supreme Court Act (Vic) 1986. For the reasons already given, however, the mistakes attending the 2011 loan agreement are not of the fundamental character required to give an entitlement to Mr McKay to rescind it or to render it void.
125 In my view, the plaintiff is entitled to judgment for the principal sum and interest, with the principal sum adjusted so as to remove the $9,100 which Mrs Stormont cannot account for. She is also entitled to interest at the contractual rate until the date of judgment.
126 A consequence of the slight reduction in the principal sum is that the interest paid by Mr and Mrs McKay from September 2011 to March 2012 is slightly excessive. This fact should be reflected in the calculation.
127 I will direct the plaintiff, within 14 days of this date, to bring in a minute of judgment to give effect to these reasons.
128 The costs are reserved.
- - -
0
3
0