Westpac Banking Corporation v Haynes - [2017] SASC 23

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
WESTPAC BANKING CORPORATION v HAYNES; HAYNES v ST GEORGE BANK A DIVISION OF WESTPAC BANKING CORPORATION
[2017] SASC 23
Judgment of The Honourable Justice Nicholson
2 March 2017
BANKING AND FINANCE - BANKS - BANK ACCOUNTS - INTEREST, OVERDRAFTS AND ADVANCES
BANKING AND FINANCE - BANKS - LIABILITIES OF BANKS - NEGLIGENCE
MORTGAGES - MORTGAGES AND CHARGES GENERALLY - RIGHTS AND LIABILITIES OF MORTGAGOR AND MORTGAGEE
BANKING AND FINANCE - BANKS - DUTIES OF BANKS
Matter No. 1211 of 2014 is a claim in debt by Westpac Banking Corporation (the Bank) against its former customer, Jonathon Wilfred Haynes, for an amount said to be due pursuant to an overdrawn portfolio loan account and certain other fully drawn advances. Matter No. 1436 of 2014 is a claim by Mr Haynes against St George Bank, being a division of Westpac, seeking damages for, inter alia, alleged failures by it to act prudently, as required by clause 25.1 of the Code of Banking Practice, when assessing Mr Haynes’ capacity to service the portfolio loan account when an extended limit was agreed to in October 2009. To the extent that Mr Haynes were to succeed with his damages claim, such damages would be available to reduce the amount otherwise due to the Bank on its debt claim. The trial for each claim was heard concurrently.
As at October 2009, Mr Haynes had been a customer of the Bank for almost two years. He had, what is described in the evidence as, a portfolio loan account with the Bank. When first acquired, in 2007, the portfolio loan account credit limit was $1,700,000 and was secured by a number of real property assets including Mr Haynes’ residence at 37 Player Court, St Peters. However by October 2009, the original credit limit had been reduced to $912,000 and the only real property remaining as security was the St Peters property. On 24 January 2009, Mr Haynes entered into an unconditional contract to purchase a property at Longwood which had been deployed as a flower farm. The Longwood property contract provided for a long settlement period (19 October 2009).
On or about 9 October 2009, the Bank made a formal offer to Mr Haynes to increase the credit limit on his portfolio loan account to $1,790,000 in order to facilitate the Longwood purchase, which offer was accepted by Mr Haynes.
The increase of $878,000 was the amount needed to enable the Longwood settlement to take place and to cover anticipated transaction costs. Longwood was added as part of the security for the portfolio loan account. It was Mr Haynes’ intention thereafter to sell his St Peters residence, to cease undertaking real estate agency and property development work and to retire to the Longwood property but with a view to continuing its operation as a flower farm. The parties anticipated that St Peters would sell relatively quickly and for a price in the order of $1,600,000.
However, the St Peters property proved difficult to sell. In order to assist with preparing St Peters for sale, working capital requirements and servicing the portfolio loan account pending the sale of St Peters, Mr Haynes obtained from the Bank a fully drawn advance of $50,000 in March 2010, rising to $130,000 in January 2011. The fully drawn advance attracted an interest rate significantly higher than that applicable to the portfolio loan account.
In fact, St Peters did not sell until July 2012 and then for an amount of only $1,040,000. During the period between the draw down on the increase in the portfolio loan credit limit and the sale of St Peters, Mr Haynes was unable to fully service his facilities and the interest expense increased significantly.
As a consequence, Mr Haynes’ commitment to the Bank caused by the accumulating interest expense increased to an extent such that Westpac issued a notice of default, as at 14 July 2014, requiring repayment by Mr Haynes of an amount of $1,256,913.60. Mr Haynes was unable to meet the demand and in due course the Longwood property was also sold, with settlement in August 2015, for an amount of $760,000. The net proceeds of sale were directed to reducing the portfolio loan account balance but Mr Haynes, nevertheless, remained very substantially indebted to the Bank. This debt has continued to increase by virtue of the Bank’s imposition of further interest charges and its claim to be reimbursed for its legal costs.
The Bank in its action claims all amounts contractually due under the portfolio loan account and the fully drawn advance by way of principal, interest and legal costs. Mr Haynes’ case, in essence, is that the Bank breached a contractual obligation owed to him to act prudently when assessing his capacity to service the increased limit of the portfolio loan account. The offer to extend the limit should never have been made. As a consequence, he is entitled to damages sufficient to put him in the same financial position he would have been in had the Bank refused to fund his acquisition of Longwood. Had the Bank so refused, Mr Haynes would have declined to proceed with the Longwood settlement, would have retained his St Peters property and would have avoided the further financial exposure to the Bank and other financial loss caused by his entering into the increased borrowing for and the completion of the purchase of Longwood.
Held:
1. The Bank’s claim in Matter No. 1211 of 2014 is allowed subject to 2. Below.
2. The Bank’s pre-judgment interest calculation with respect to its claim is to be adjusted on the basis that the fully drawn advance is to be treated as having been discharged upon receipt by the Bank of the St Peters settlement proceeds.
3. Mr Haynes' claim in Matter No. 1436 of 2014 is dismissed.
4. The Bank is to prepare draft minutes of order consistent with the reasons for judgment.
Consumer Credit (South Australia) Act 1995 (SA); Consumer Credit (Queensland) Act 1994 (Qld); Trade Practices Act 1974 (Cth) s 52; Competition and Consumer Act 2010 Sch 2; Australian Securities and Investment Commission Act 2001 (Cth) s 12CB, s 12CC, s 12DA; Trade Practices Act 1974 s 51AC; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 s 4, s 7, referred to.
Re Adelphi Hotel (Brighton) Ltd [1953] 1 WLR 955; Micarone v Perpetual Trustees Australia Ltd (No 2) [1999] SASC 533; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd [2014] SASC 141; Shakespeare Haney Securities Ltd v Crawford [2009] 2 Qd R 156; Dale v Nichols Constructions Pty Ltd [2003] QDC 453; Bank of Queensland v Dutta [2010] NSWSC 574; Likenholt Pty Ltd v Quirk [2000] VSC 166; Hamafam Pty Ltd v Saadullah [2007] NSWSC 818; Perpetual Trustees Australia Ltd v Barker [2004] SASC 58, (2004) 232 LSJS 4000; Liberty Funding Pty Ltd v Steele-Smith [2004] NSWSC 1100; Commonwealth Bank of Australia v Doggett [2014] VSC 423; NAB Ltd v Rose [2015] VSC 10; NAB Ltd v Rose [2016] VSCA 169; CBA v Wood [2016] VSC 264; Doggett v Commonwealth Bank of Australia [2015] VSCA 351; ANZ Banking Group Ltd v Fink [2015] NSWSC 506; Fitzgerald v Masters (1956) 95 CLR 420; Astley v Austrust Ltd (1999) 197 CLR 1; Beckley v Consumer, Trader and Tenancy Tribunal [2009] NSWSC 703, considered.

WESTPAC BANKING CORPORATION v HAYNES; HAYNES v ST GEORGE BANK A DIVISION OF WESTPAC BANKING CORPORATION
[2017] SASC 23
Civil
NICHOLSON J.
Introduction

These reasons for judgment concern two claims the trials of which were heard concurrently. Matter No. 1211 of 2014 is a claim in debt by Westpac Banking Corporation against its former customer, Jonathon Wilfred Haynes, for an amount said to be due pursuant to an overdrawn portfolio loan account and certain other fully drawn advances. Matter No. 1436 of 2014 is a claim by Mr Haynes against St George Bank seeking damages for, inter alia, alleged failures by it to act prudently, as required by clause 25.1 of the Code of Banking Practice, when assessing Mr Haynes’ capacity to service the portfolio loan account when an extended limit was agreed to in October 2009.
For convenience, I will refer to the parties as “Westpac” (or “the Bank”)[1] and “Mr Haynes” and to the two actions as “the Westpac Action” and “the Haynes Action”.
[1] At the time Mr Haynes commenced his business relationship with the Bank (late 2007) he dealt with BankSA which was, at the time, a subsidiary of St George Bank but run as a separate entity. After the merger of Westpac Banking Corporation with St George Bank in 2008, BankSA became a subsidiary of Westpac.
To the extent that Mr Haynes were to succeed with his damages claim, such damages would be available to reduce the amount otherwise due to the Bank on its debt claim. Mr Haynes claims substantial damages and it may be that, if his claim were to be allowed in full, not only would the Bank’s debt be discharged but the Bank would owe a balance to Mr Haynes.
As at October 2009, Mr Haynes had been a customer of the Bank for almost two years. He had, what is described in the evidence as, a portfolio loan account[2] with the Bank. When first acquired, in 2007, the portfolio loan account credit limit was $1,700,000 and was secured by a number of real property assets including Mr Haynes’ residence at 37 Player Court, St Peters. However by October 2009, the original credit limit had been reduced to $912,000 and the only real property remaining as security was the St Peters property.
[2] A portfolio loan operates effectively as an overdraft facility that (subject to conditions) permits the customer to deposit and redraw funds at their convenience provided the credit limit is not exceeded.
For most of his working life, Mr Haynes, who was 51 or so as at October 2009, had been a successful real estate agent and, during the latter years, a successful property developer.
On 24 January 2009, Mr Haynes entered into an unconditional contract to purchase a property at Lot 10 Scott Creek Road, Longwood for a purchase price of $850,000 with a deposit of $10,000. The Longwood property had been used as a flower farm and, at the time Mr Haynes contracted to purchase it, he was told that there were something like 1,000,000 daffodil bulbs in the ground. He was told that it was the State’s largest daffodil supplier. The Longwood property contract provided for a long settlement period (19 October 2009). Mr Haynes explained that one reason for his wanting a delayed settlement was that at the time he inspected the property he saw insufficient evidence of the bulbs and he wanted to see “the spring stocks come through”.
For various reasons, Mr Haynes had been in no hurry to secure financial accommodation to enable the settlement to proceed and it was not until 9 October 2009 that the Bank made a formal offer to Mr Haynes to increase the credit limit on his portfolio loan account to $1,790,000 in order to facilitate the purchase which offer was accepted by Mr Haynes.
The increase of $878,000 was the amount needed to enable the Longwood property settlement to take place and to cover anticipated transaction costs. Longwood was added as part of the security for the portfolio loan account. It was Mr Haynes’ intention to sell his St Peters residence, to cease undertaking real estate agency and property development work and to retire to the Longwood property but with a view to continuing its operation as a flower farm.
Mr Haynes provided a broad overview of the property. In addition to the 1,000,000 daffodil bulbs, it contained Nerine bulbs, 30,000 Belladonna lilies and three irrigated acres of the type of foliage used by florists. Mr Haynes described the appetite of the flower market for this foliage as “insatiable”. The income earning potential of Longwood as a flower farm was seen as important by Mr Haynes.
In broad terms, it was Mr Haynes’ expectation, shared by the Bank, that the St Peters property would sell, and sell easily, for approximately $1,600,000. The proceeds of sale were to be used to reduce the portfolio loan account debit balance to something in the order of $190,000. According to Mr Haynes, this would be a manageable mortgage bearing in mind his intended retirement from active real estate agency and property development work and his plans to take advantage of the flower farm opportunity at Longwood.
Immediately before the draw down on the extended credit limit on 19 October 2009, the debit balance stood at $888,567.99. After the draw down the debit balance increased to $1,771,608.09. By 31 October, the debit balance had become $1,781,916.97, but bearing in mind that the extended credit limit was then $1,790,000. The interest rate was variable. However, at the time of the draw down the annual interest rate was a relatively low 5.44 per cent with a default rate of 8.44 per cent. Assuming that monthly interest was paid on time and there were no significant reductions in principal over the short term, the annual interest expense had become in the order of $96,000 as compared with in the order of $48,000 immediately prior to draw down.
The extended facility, on the terms granted, did not have the characteristics of the Bank’s standard bridging loan facility. Nevertheless, it was the intention of both parties from the outset that it was only to be a short term facility to enable settlement of the Longwood property to take place before steps had to be taken to enable St Peters to be sold and the portfolio loan account balance substantially reduced in accordance with Mr Haynes’ retirement plan. At first blush, given: that the Bank held a valuation of St Peters of $1,600,000 prepared by one of its panel valuers in October 2007; Mr Haynes’ confidence as an experienced real estate agent that such a price would easily be obtained;[3] and the apparent value of Longwood, a credit limit of $1,790,000 presented to both parties as relatively low risk. Unfortunately, this did not prove to be the case.
[3] In 2007, Mr Haynes himself had obtained two real estate valuer appraisals, one at $1.64 million to $1.8 million and another at $1.875 million.
The St Peters property proved difficult to sell. In order to assist with preparing St Peters for sale, working capital requirements and servicing the portfolio loan account pending the sale of St Peters, Mr Haynes obtained from the Bank a fully drawn advance of $50,000 in March 2010, rising to $130,000 in January 2011 (the FDA). The FDA attracted an interest rate significantly higher than that applicable to the portfolio loan account. Initially the FDA (as increased to $130,000) was due to terminate on 31 March 2011 as to the first, $50,000 tranche and 30 April 2011 as to the second, $80,000 tranche. A number of extensions were granted until it ultimately expired 30 November 2011 with principal and interest still unpaid.
In fact, St Peters did not sell until July 2012 and then for an amount of only $1,040,000. During the period between the draw down on the increase in the portfolio loan credit limit and the sale of St Peters, Mr Haynes was unable to fully service his facilities and the interest expense increased significantly.
As a consequence, Mr Haynes’ commitment to the Bank caused by the accumulating interest expense increased to an extent such that Westpac issued a notice of default, as at 14 July 2014, requiring repayment by Mr Haynes of an amount of $1,256,913.60.[4] Mr Haynes was unable to meet the demand and in due course the Longwood property was also sold, with settlement in August 2015, for an amount of $760,000. The net proceeds of sale were directed to reducing the portfolio loan account balance but Mr Haynes, nevertheless, remained very substantially indebted to the Bank. This debt has continued to increase by virtue of the Bank’s imposition of further interest charges and its claim to be reimbursed for its legal costs.
[4] Exhibit B2, p98.
The Bank’s claim as at the date of trial amounted to a sum in excess of $1,300,000 (see further below). Mr Haynes’ case, in essence, is that the Bank breached a contractual obligation owed to him to act prudently when assessing his capacity to service the increased limit of the portfolio loan account. The offer to extend the limit should never have been made. As a consequence, he is entitled to damages sufficient to put him in the same financial position he would have been in had the Bank refused to fund his acquisition of Longwood. Had the Bank so refused, Mr Haynes would have declined to proceed with the Longwood settlement, would have retained his St Peters property and would have avoided the further financial exposure to the Bank and other financial loss caused by his entering into the increased borrowing for and the completion of the purchase of Longwood.
The Westpac Action
The Bank maintains that it is entitled to judgment in its action in the sum of $1,314,428.22 pursuant to a Certificate of Debt which has a contractual status as prima facie evidence of the amount claimed by the Bank. That Certificate of Debt records the amount calculated by the Bank due as at 29 February 2016. The Bank claims this amount together with accruals of interest after that date and any additional legal costs of recovery to which the Bank is contractually entitled. That this is a correct calculation of the amount due and payable by Mr Haynes in accordance with his contractual obligations owed to the Bank does not appear to be challenged but for three matters.
(i)The ultimate amount due and payable to the Bank will be subject to any offsetting damages claim to which Mr Haynes may be found entitled.
(ii)Mr Haynes challenges the basis upon which the Bank has charged and incorporated interest. In essence, Mr Haynes maintains that the Bank has charged interest at a rate or in a manner to which it is not contractually entitled.
(iii)Mr Haynes challenges the basis upon which the Bank has charged and included its legal costs of recovery, being a basis to which, according to Mr Haynes, the Bank has no contractual or other entitlement.
If the Bank were to succeed in full with respect to its claim, it would be entitled to judgment in the amount of $1,314,428.22 as at 29 February 2016, together with further interest and costs properly falling due thereafter. However, this is subject to the three contentious matters just now identified. I will address the challenges to the Bank’s claim in (ii) and (iii) above before dealing with Mr Haynes’ claim for damages.
The Bank’s claim for interest on the outstanding balance of the FDA
The Bank received the proceeds of sale of St Peters in July 2012. However, no part of those proceeds were directed by the Bank in discharge of the FDA principal of $130,000. All of the proceeds were used to reduce the principal owing under the portfolio loan. The practical consequence for the parties is that the FDA has not been discharged and the Bank has continued to charge the FDA default rate of interest on the full amount of its principal still said to be due and owing. The difference between the FDA default rate of interest[5] and the variable rate payable under the portfolio loan is significant.
[5] The FDA default rate has been charged at 20.25 per cent per annum for the entire period.
Mr Haynes contends that the Bank was obliged to use the St Peters sale proceeds to first discharge the FDA with the balance then being available to reduce the portfolio loan. The resolution of this issue depends essentially on the proper construction of the parties’ agreement.
The Bank’s letter of 21 January 2011 offering the FDA (as to its final amount)[6] was accepted by Mr Haynes on 24 January 2011.[7] The “facility” on offer was described in these terms.
[6]    Exhibit B2, tab 8, p75.
[7]    Exhibit B2, tab 8, p80.
1.   Fully Drawn Advance – Fixed Term/Fixed Interest (existing) $50,000
2.   Fully Drawn Advance – Fixed Term/Fixed Interest (new) $80,000
Total $130,000
The “purpose” of the FDA as offered was described as follows.
The facilities are to be used for the following purposes, or for such other purposes as approved in writing by the Bank:
1.to assist with preparation costs of 37 Player Court, St Peters property prior to placing on the market for sale
2.to cover interest costs from 31/10/2010 to 28/2/2011 and working capital requirements pending sale of 37 Player Court, St Peters
The letter of offer also contained the following under the heading “Terms”.
[Insofar as the first, $50,000 tranche is concerned] your Fully Drawn Advance is available until 31 March 2011 at which time this facility is to be repaid in full from settlement proceeds of 37 Player Court, St Peters.
The facility terminates on 31 March 2011.
[Insofar as the second, $80,000 tranche is concerned] your Fully Drawn Advance is available until 30 April 2011 at which time this facility is to be repaid in full from settlement proceeds from 37 Player Court, St Peters.
The facility terminates on 30 April 2011.

Whilst the FDA was due to terminate on 31 March 2011 (as to the original $50,000) and 30 April 2011 (as to the second, $80,000 tranche), as earlier indicated, a number of extensions were granted until the FDA ultimately expired 30 November 2011 with principal and interest still unpaid. The letters of variation which extended the term of the FDA contain the same wording dealing with the repayment of the facility from the St Peters settlement process.
The Bank maintains that the FDA is governed by the FDA Letter of Offer just referred to, together with the Bank’s “Standard Facility Conditions” which are described in the Bank’s submissions as the Bank’s “FDA Terms and Conditions”.[8] I accept this submission. The letter of offer included the following.
The Bank’s Standard Facility Conditions (03/2010 version) attached to this letter ... are incorporated in this letter and form part of the Agreement ...”
Clause 3.5 of the Standard Facility Conditions is in the following terms:
[8] Exhibit B2, tab 9.
3.5 Appropriation
The Bank may, subject to any express provision in the Agreement to the contrary, appropriate any payment towards the satisfaction of any monies due by the Customer in relation to the Transaction Documents in any way that the Bank thinks fit.
[emphasis supplied]
It is the Bank’s contention that this provision provided the Bank with, in effect, an unfettered discretion to appropriate any funds paid in by Mr Haynes towards the satisfaction of any monies due by him with respect to any aspect of his facility.
Mr Haynes relies on the qualification in clause 3.5 – “subject to any express provision in the Agreement to the contrary ...”. At the beginning of the Standard Facility Conditions, immediately after the description of contents, is the following.
Where a copy of the Standard Facility Condition (“Conditions”) accompanies a Letter of Offer it is incorporated in the offer and forms part of the Agreement which results from acceptance of the offer (“Agreement”).
According to clause 3.5, the Bank does have the discretion as relied upon by the Bank but it is “subject to any express provision in the Agreement to the contrary”. For present purposes, the Agreement referred to in clause 3.5 is the Agreement the parties entered into resulting in the FDA. The terms and conditions of that Agreement are those as set out in the Letter of Offer, together with the Standard Facility Conditions, including clause 3.5. As a consequence, it is open to Mr Haynes to point to and to rely upon any “express provision” to be found in the FDA Letter of Offer which, on its proper construction, would operate to restrict the unfettered discretion otherwise available under clause 3.5. In this respect, Mr Haynes relies upon the “term” contained in the Letter of Offer that:
Your Fully Drawn Advance is available until ... at which time this facility is to be repaid in full from settlement proceeds of 37 Player Court, St Peters.
Mr Haynes contends that this obliged the Bank to fully discharge the FDA once it received the St Peters settlement proceeds. The Bank contends that, on its proper construction, this “term” does not so oblige the Bank and that it is of no assistance to Mr Haynes, leaving clause 3.5 of the Standard Facility Conditions untrammelled. The Bank raises a number of arguments in support of this contention.
The Bank contends that on its proper construction the language of the “term” in the FDA Letter of Offer does no more than impose a condition on the Bank’s customer, that is, that the FDA loans must be repaid upon the sale of St Peters such that the funds would not continue to be available to the customer after that time. However, the term does not, on its proper construction, compel the Bank to apply to proceeds of sale in any particular way. I do not accept this argument. On the Bank’s argument and in accordance with the language of the term itself, Mr Haynes assumed an obligation not just to make the St Peters settlement proceeds available to the Bank,[9] rather Mr Haynes assumed an obligation to repay the FDA facility in full. The Bank’s contention that this gave rise to a unilateral rather than a bilateral obligation would lead to the situation that should Mr Haynes have managed to settle St Peters within the allowed timeframe and thereupon made available the settlement proceeds to the Bank, he nevertheless would fall into and remain indefinitely in default of the FDA terms and conditions at the whim of the Bank and have no way of avoiding this. Mr Haynes would have an unconditional obligation to discharge the FDA but the Bank could refuse (as it did) to allow him to do this. The construction propounded by the Bank for a unilateral obligation would lead to a wholly unreasonable and uncommercial result and one which is not mandated by the language.
[9] These inevitably would have fallen under the control of the Bank in any event given the terms of the portfolio loan advance and the practical imperative arising from the fact that the Bank held a mortgage over St Peters and any settlement of the sale would not proceed in the absence of the Bank being able to exercise control over those funds.
The Bank also contends that the construction contended for by Mr Haynes would render the FDA Letter of Offer inconsistent with the FDA Terms and Conditions. Again, I disagree. Clause 3.5 of the FDA Terms and Conditions applies but only “subject to any express provision to the contrary”. The FDA Letter of Offer contains an express provision which on its natural and ordinary reading obliges the Bank upon receipt of the St Peters settlement proceeds to fully discharge the FDA.
Finally, the Bank relies upon the FDA Letter of Offer requiring the payment from the sale of the St Peters property by a fixed date which never occurred. The Bank contends that even if it would have been obliged to discharge the FDA from the St Peters proceeds of sale, any such obligation was conditional on the sale taking place within the nominated timeframe. I do not accept this argument. The fact that Mr Haynes failed to observe the obligation imposed upon to discharge the FDA by a specified date does not detract from the mutual obligation provided for that the FDA was to be discharged with the proceeds of the St Peters settlement. That was at all times the understanding and arrangement between the parties. From the outset, the only way in which the portfolio loan account and the FDA were to be discharged was through the sale of St Peters. I agree with the submission put on behalf of Mr Haynes that the FDA Agreement should be construed in the light of its context. The FDA was entered into for the purposes as set out in the Letter of Offer and as identified earlier in these reasons. It was only ever regarded by the parties as short term finance in order to facilitate the sale of St Peters and to assist Mr Haynes to maintain his financial obligations while that took place whenever that was to occur.
The Bank was obliged upon receiving the settlement proceeds for St Peters to discharge the whole of the FDA before using any balance by way of reduction for the portfolio loan account. Accordingly, I accept Mr Haynes’ contention that the Bank’s claim must be recalculated by using the lower rate of interest applicable to the portfolio loan account.
The Bank’s claim for legal costs
The Bank contends that it is entitled to its legal costs incurred in both pursuing the Westpac Action and in defending the Haynes Action on a contractual basis, such costs to include both pre-trial costs and the costs of the trial. The Bank contends that its costs are recoverable on an indemnity basis under the Mortgage Memorandum in addition to the principal debt and interest on it.
Clause 17 of the Mortgage Memorandum[10] is in the following terms:
[10] Exhibit B2, tab 3, p17.
17.1This clause 17 applies to the extent that a Consumer Credit Code does not apply to this mortgage.
17.2When we ask, you must pay us for:
(a)     our reasonable COSTS, and any receiver’s COSTS and remuneration, in arranging, administering (including enforcing, attempting to enforce or taking any other action in connection with our rights or any receiver’s rights), releasing and terminating this mortgage or any AGREEMENT COVERED BY THIS MORTGAGE; and
(b)     all stamp and other duties, fees, taxes and charges payable in connection with this mortgage, any AGREEMENT COVERED BY THIS MORTGAGE and any transaction or return relating to them and any interest, penalties, fines and expenses in connection with them.
17.3You indemnify us against, and you must therefore pay us for, liability, loss or COSTS (including consequential or economic loss) we suffer or incur:
(a)     if you default under this mortgage (in which case you will also be liable for any loss arising because we require payment of the AMOUNT OWING earlier than its due date); or
(b)     in connection with the property or our monitoring of WORKS.
17.4The indemnity in clause 17.3 is a continuing obligation; independent of your other obligations under this mortgage. It continues after we release the property from this mortgage.
The word “costs” is defined in the Mortgage Memorandum to include:[11]
Charges and expenses, and costs, charges and expenses in connection with legal and other advisers on a full indemnity basis.
[11] Exhibit B2, tab 3, p20.
As a starting point, where a mortgage agreement refers to costs or reasonable costs, such will be taken to refer only to costs on a party and party basis, that is, as “an assertion or reminder of the [mortgagee’s] ordinary right, upon realising or enforcing its security, to recover its costs charges and expenses”.[12] However, this starting position will give way to any clear language to the contrary contained in the parties’ contract. As Vaisey J put it in Re Adelphi Hotel (Brighton) Ltd:[13]
[It] seems to me that if parties desire to depart from such a rule, they must express themselves in plain and unequivocal language.
I agree with the Bank’s submission that the definition of ‘costs’ in the Mortgage Memorandum as set out above provides, in plain and unequivocal language, to this effect. In the present case and subject to that which follows, the contractual document between the parties has expressly provided for the Bank’s right to recover its costs on an indemnity basis.
[12] Re Adelphi Hotel (Brighton) Ltd [1953] 1 WLR 955 at 960. See Micarone v Perpetual Trustees Australia Ltd (No 2) [1999] SASC 533; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd [2014] SASC 141 at [29].
[13] [1953] 1 WLR 955 at 960.
However, clause 17 of the Mortgage Memorandum only applies to the extent that a “Consumer Credit Code” does not apply to the mortgage.[14] The question that needs to be determined is whether or not a consumer credit code applied to the parties’ transaction such as to impose a restriction on the application of clause 17. The only such consumer credit code potentially applicable is the Uniform Consumer Credit Code (UCCC)[15] which was in force in South Australia until June 2010.
[14] See clause 17.1 as earlier set out.
[15] See Appendix 1 to the Consumer Credit (Queensland) Act 1994 (Qld) as adopted by the Consumer Credit (South Australia) Act 1995 (SA).
In essence, the Bank contends that because Mr Haynes signed a “Business Purpose Declaration” in respect of the initial portfolio loan in November 2007 and in respect of the portfolio loan increase in October 2009, the operation of the UCCC is expressly excluded. Section 11 of the UCCC was in the following terms:
11.Presumptions relating to application of Code
(1)     In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established.
(2)     Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).
(3)     However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained.
(4)     A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of this section if it is not.
The Bank relies on the conclusive presumption provided for in section 11(2) having arisen as a result of the execution by Mr Haynes of the business purpose declarations referred to above. The business purpose declarations executed by Mr Haynes[16] on their face operate to satisfy the conclusive presumption provided for by section 11(2). The declarations were in the following terms.
[16] Exhibit B4, p2 and exhibit H5, tab 26, p260.
I declare that the credit to be provided to me by BankSA is to be applied wholly or predominantly for business or investment purposes (or for both purposes).
Important
You should not sign this declaration unless this loan is wholly or predominantly for business or investment purposes. By signing this declaration you may lose your protection under the Consumer Credit Code.
The question arises as to whether or not it should be found that the declarations, notwithstanding their terms and notwithstanding their execution by Mr Haynes, were ineffective to give rise to the conclusive presumption by virtue of the terms of section 11(3). This requires a consideration of whether the Bank “knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes”.
This would appear to align with section 6(1)(b), which provides that the UCCC will not apply in circumstances where “the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes”.
The Bank submits to the effect that Mr Haynes bears an onus to prove that, at the time each declaration was made, it was false, that is, that the credit supplied was in fact to be applied wholly or predominantly for personal, domestic or household purposes and, further, that the Bank “knew or had reason to believe” this. I agree with that submission.[17]
[17] See, generally, Shakespeare Haney Securities Ltd v Crawford [2009] 2 Qd R 156.
As far as the first declaration, relating to the initial grant in 2007 of the portfolio loan, is concerned, Mr Haynes gave no evidence of having signed that declaration in error. The BLAST for the initial portfolio loan described its purpose as refinancing of existing NAB facilities and to assist with “ongoing property investment requirements”.[18] I do not understand it to be contended by Mr Haynes that the NAB portfolio loan which was refinanced was anything other than a business purpose loan. I accept the Bank’s submission that there is no reason to go behind the business purpose declaration signed at the time of the initial portfolio loan advance in 2007. There is no or insufficient evidence to establish that the declaration was false in that the initial portfolio loan was in fact wholly or predominantly for a personal, domestic or household purpose or, and even if so, that the Bank knew or had reason to believe this.
[18] Exhibit B13A, p1 and p7 of the application.
The position with respect to the portfolio loan extension granted in October 2009 for the purpose of acquiring Longwood and the status of the business purpose declaration executed at that time by Mr Haynes raise different considerations.
Mr Haynes did not suggest in his evidence that the business purpose declaration signed in October 2009 had been signed in error. This is consistent with the fact that Mr Haynes at all times intended to conduct the flower farm business that had been established at the Longwood property. It wasn’t as if Mr Haynes proposed to enter into full time retirement according to the common understanding of that notion. Mr Haynes’ plan was to substantially stop working as a real estate agent and a property developer so as to live in the Adelaide Hills at Longwood and conduct the flower farm. This was to be more than a hobby, as is evident from the nature and potential of the business, as earlier described. The flower farm business, which was named “Flower Folly”, was to be conducted through Performa, the company fully owned and controlled by Mr Haynes and his domestic and business partner, Ms Ward. The evidence supports the following findings.
(i)Some three weeks or so before settlement of Longwood, on or about 24 September 2009, Performa registered the business name “Flower Folly”. The application form recorded that Mr Haynes was the contact person with respect to the application. The business to be conducted was recorded as flower growing and the address for the conducting of the business was Longwood. The application was signed by Mr Haynes.[19]
(ii)The application was lodged on 1 October 2009, prior to the settlement of Longwood.[20]
(iii)Mr Haynes claimed a tax deduction with respect to interest paid for the Longwood borrowing to be offset against rental income earned by him from Performa.[21]
(iv)Performa recorded in its financial statements for the year ending 30 June 2010 a rental expense of $21,000[22] which correlated with the Longwood rental income disclosed by Mr Haynes in his 2010 tax return.[23]
[19] Exhibit B20.
[20] Exhibit B21.
[21] Exhibit H5, tab 33, p350; exhibit H5, tab 47, p411.
[22] Exhibit B24, p2.
[23] Exhibit H5, tab 33, p350.
I am satisfied that prior to the settlement of Longwood and, in particular, at the time that the business purpose declaration was signed in October 2009, Mr Haynes intended to conduct the Flower Folly business from the Longwood property as well as to reside at that property. Mr Haynes structured his arrangements with respect to his borrowing for the purchase of Longwood and the conduct, by his company Performa, of the Flower Folly business in a way that would permit him to claim the expenses associated with occupying Longwood and in particular the interest expense on the portfolio loan extension used to acquire Longwood, as tax deductable expenses.
The Bank made a submission that, when determining the application of section 11(3), the relevant intention is that of the borrower at the time the credit is provided, citing Dale v Nichols Constructions Pty Ltd,[24] as it was cited in Shakespeare Haney Securities Ltd v Crawford.[25]
[24] [2003] QDC 453.
[25] [2009] 2 Qd R 156, 165.
Upon my review of Shakespeare, it would appear to this position relates to the application of section 6(1)(b) of the UCCC. It would also appear that the position in Dale is criticised by the Court in Shakespeare and, instead, a different approach was preferred:[26]
In Dale v Nichols Constructions Pty Ltd McGill DCJ, after a careful analysis of the subject provisions, concluded that “whether credit is provided for a particular purpose for the purposes of s 6(1) depends on the intention of the borrower at the time the credit is provided”.
In Linkenholt Pty Ltd v Quirk Gillard J observed:
“… it is appropriate to consider what the money was used for in order to determine the purpose of the provision of the credit. In considering the question it is important to consider the substance of the transaction in the context of its performance.”
That passage was referred to with approval by Shaw J in Jonsson v Arkway Pty Ltd. He remarked that, “His Honour's emphasis was that the court should consider the substance and reality of the transaction.”
An approach to the construction of s 6(1)(b) which considers the substance of the subject transaction and requires an objective assessment would, in my view, be preferable to one which looks to the actual intention of either the borrower or the lender. Plainly, “the purpose” for which credit is provided or intended to be provided has nothing to do with the lender's general commercial purposes: the reference is to the use to which the credit is to be put. In the great majority of transactions there would be no difficulty in determining the relevant purpose by reference to the terms of the application for credit and of the approval. If the borrower requests credit for a stated purpose and the lender approves the request and makes the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested.
The focus of s 6(1)(b) is on the provision of credit rather than on the obtaining of credit. That is inconsistent with a construction which looks to the debtor's state of mind. Also, one would think that if the legislature had in mind that, in determining the purpose for which credit was provided, the debtor's intention was the governing consideration, s 6(1)(b) would have been worded along these lines:
“The debtor intended to apply the credit wholly or predominantly for personal, domestic or household purposes.”
[26] Shakespeare Haney Securities Ltd v Crawford [2009] 2 Qd R 156 at [29]-[32].

The view of the Court in Shakespeare on this issue would appear consistent with other case law, being that the “weight of authority strongly favoured” the approach as stated in Linkenholt.[27]
[27] Bank of Queensland v Dutta [2010] NSWSC 574 at [120], citing the approach in Likenholt Pty Ltd v Quirk [2000] VSC 166 at [98]. See also, Beckley v Consumer, Trader and Tenancy Tribunal [2009] NSWSC 703 at [69].
In adopting this approach, I am satisfied that, on the evidence, the substance and reality of the loan transaction was to enable Mr Haynes to acquire Longwood in order to conduct the Flower Folly business through the structure he put in place whilst residing there.
It can be accepted that Mr Haynes did have a personal, domestic or household purpose in borrowing in order to procure the Longwood property. However, I am also satisfied that at the time Mr Haynes obtained the loan extension there was also an underlying business and/or investment purpose.[28] As such, it is necessary for me to determine for the purpose of section 11(3) whether the purpose to reside at the property was the predominant purpose, being more than 50 per cent,[29] for which the credit was applied and, if so, whether the Bank knew that the predominant purpose provided was for Mr Haynes to purchase Longwood as a residential property. According to section 11(3) the business purpose declaration signed by Mr Haynes would be ineffective if, inter alia, the credit advanced was in fact to be applied “wholly or predominantly for personal, domestic or household purposes” and the Bank knew of such fact. I am not satisfied on the evidence available that the extension of the loan to permit the acquisition of Longwood was, as far as Mr Haynes is concerned, “wholly or predominantly” for personal, domestic or household purposes.
[28] See, generally, the discussion of these terms in the context of the UCCC in Shakespeare Haney Securities Ltd v Crawford [2009] 2 Qd R 156.
[29] Bank of Queensland v Dutta [2010] NSWSC 574 at [130] and Hamafam Pty Ltd v Saadullah [2007] NSWSC 818 at [23].
The situation may have been different if Mr Haynes had not intended to “retire” from his real estate agency and development work but rather to continue to work in his profession whilst also living at Longwood and running a “hobby farm”. However, that was not the case. The substance and reality of the loan transaction was to enable Mr Haynes to cease one form of business occupation and to take up another form of business occupation. Mr Haynes was only 51 at the time and it was not as if the flower farm (as described earlier in these reasons) was a modest enterprise. At the least, it had the potential to be the largest supplier of daffodils in the state. The phrase in section 11(3) “wholly or predominantly” must be given work to do. The onus is on Mr Haynes to have demonstrated a “wholly or predominantly” personal, domestic or household purpose in taking out the portfolio loan extension. Mr Haynes has demonstrated a household purpose associated with the acquisition of Longwood. As at October 2009, Longwood was to be his future residence. However, as I have indicated, I am not satisfied on the evidence that Mr Haynes has demonstrated that this was “wholly or predominantly” the purpose of the portfolio loan extension.
For these reasons, I accept the Bank’s contention that the business purpose declaration remains unimpeached and that the UCCC did not apply to the funds advanced in respect of Longwood. As a consequence, clause 17.3 of the Memorandum of Mortgage (as earlier set out) applies according to its terms. The Bank has made alternative submissions which it contends give rise to the same conclusion in the event that a finding that the UCCC did apply was to be made. However, it is unnecessary for me to give consideration to these matters. In my view, clause 17.3 gives rise to a contractual right in the Bank to recover its legal costs incurred in enforcing its entitlements against Mr Haynes on an indemnity basis.
A subsidiary issue still needs to be considered. The Bank contends that it enjoys this contractual entitlement to recover its legal costs with respect to both the Westpac Action and the Haynes Action. The costs of the former in which the Bank seeks judgment for the debt it maintains is due under its contract with Mr Haynes clearly falls within and is contemplated by clause 17 of the Mortgage Memorandum and the definition of costs as included therein. As far as the latter action is concerned, the Bank seeks its costs necessarily incurred in protecting and preserving its rights to obtain judgment for the debt due. This is a case where the Bank has had no choice but to incur legal costs in an effort to protect its primary interest. It has had no choice but to respond to and defend the Haynes Action. In these circumstances, the Bank’s legal costs incurred with respect to the Haynes Action also fall to be recovered in accordance with the contractual entitlement as provided for by clause 17 of the Memorandum of Mortgage. This finding is consistent with relevant authorities.[30]
[30] See, generally, Perpetual Trustees Australia Ltd v Barker [2004] SASC 58; (2004) 232 LSJS 4000 and Liberty Funding Pty Ltd v Steele-Smith [2004] NSWSC 1100.
The Haynes Action
The Bank officer who dealt directly with Mr Haynes and whose conduct is the primary focus of challenge was Mr Christopher Pole. Mr Pole joined BankSA in December 2006 as Senior Manager of the major client group. As part of that role he exercised lending duties and had the oversight of other lending staff. He had a small client base allocated to him and his business development role required that he expand that client base. As will be explained later in these reasons, Mr Pole assumed responsibility for Mr Haynes’ account with the Bank. It was Mr Pole who was, essentially (but with the assistance of employees whom he supervised), responsible for assessing and recommending for approval Mr Haynes’ application to extend the portfolio loan account credit limit.
Mr Pole’s superior in the Bank, Mr Paul Davy, held the position during the period 2000-2013 of Executive Manager, Risk and Compliance. He had a lending discretion as at mid-2009 of up to $75,000,000 and he had authority to approve, on a case by case basis, exceptions to Bank policy requirements when offering finance. Mr Davy was also involved in the process for approving the increase in Mr Haynes’ credit limit.
Initially, Mr Haynes pressed three legal bases for his claim for damages, all in reliance on the conduct of officers of the Bank at the time of the approving and granting of the extension of the limit for the portfolio loan account.
Mr Haynes alleges, in his pleadings, that the Bank engaged in misleading and deceptive conduct and in unconscionable conduct when assessing and granting the increase in credit limit, essentially by way of the conduct of its bank officers and in particular Mr Pole and Mr Davy.[31] These claims were not developed in Mr Haynes’ final written submissions. For reasons I will briefly explain in due course, there is no substance to these claims and they should be dismissed.
[31] The claims are said to be pursuant to section 52 of the Trade Practices Act 1974 (Cth) (now section 18 of the Australian Consumer Law which forms Schedule 2 of the Competition and Consumer Act 2010), section 12DA and section 12CB/CC respectively of the Australian Securities and Investment Commission Act 2001 (Cth) and section 51AC of the Trade Practices Act 1974.
Mr Haynes’ primary claim is a contractual claim. Mr Haynes alleges that the Code of Banking Practice 2004[32] (the Code) was contractually incorporated into the parties’ portfolio loan account agreement and that, in contravention of clause 25.1 of the Code, the Bank did not exercise the care and skill of a diligent and prudent banker when it approved the portfolio loan account credit limit increase.
[32] The Code is the banking industry’s customer charter on good banking practice. It takes effect with respect to those financial institutions that adopt it. There is a revised Code in place (as at 2013). The 2004 version was in force and had been adopted by the Bank as at October 2009.
It is common ground that clause 25.1 of the Code was incorporated into the parties’ agreement and, as such, has contractual force. Clause 25.1 provides as follows.
25 – Provision of credit
25.1 Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and forming our opinion about your ability to repay it.
As a general proposition a bank does not owe its customer a duty of this nature in contract or in tort.[33] Nevertheless, it is well accepted that clause 25.1, when incorporated contractually into a banker and customer relationship, will provide for, at least, a contractual warranty by the bank in accordance with its terms.[34]
[33] Commonwealth Bank of Australia v Doggett & Ors [2014] VSC 423 at [102] and cases there cited (Hargrave J).
[34] In CBA v Wood [2016] VSC 264, Elliott J had to consider various other clauses of the Code that had been incorporated into a bank guarantee. In so doing, his Honour canvassed the issue of whether or not the clauses were to be characterised as warranties, conditions or intermediate terms for the purpose of determining whether or not a right of termination might have arisen, [106]-[112]. In the present case, the question of termination cannot, in any practical sense, arise. Further, the claim by Mr Haynes has only ever been pressed as a claim for damages for, in effect, a breach of warranty by the Bank.
In analysing the reach of clause 25.1 when incorporated into a contract of bank guarantee, Hargrave J in Commonwealth Bank of Australia v Doggett[35] observed:
Clause 25.1 of the Code is in my opinion a contractual obligation extending beyond the previously recognised duties or obligations of banks. It is expressed in promissory language (“we will”) and the promise is expressly one to “exercise the care and skill of a diligent and prudent banker” for a specific purpose.
Hargrave J also observed[36] that clause 25.1 imposes a specific contractual obligation on the bank, namely “a promise ... to exercise, or warranty that [the bank] has exercised, the stipulated standard of care in forming the requisite opinion before offering the relevant credit facility”. The focus is upon the bank’s conduct and upon the process undertaken by the bank in arriving at a decision whether or not to approve a particular transaction. As McLeish JA (with whose reasons in this respect Whelan JA and Garde AJA agreed) observed on appeal.[37]
The question of breach is ... to be answered in the first instance, as the Judge did, by considering the way in which the Bank evaluated the financial position of [the borrower].
[35] Commonwealth Bank of Australia v Doggett [2014] VSC 423 at [118]. To date, most authorities dealing with clause 25.1 and other provisions of the Code have involved claims by guarantors for breach of Code provisions incorporated into bank guarantee documents, see for example, NAB Ltd v Rose [2015] VSC 10 and, on appeal, [2016] VSCA 169; CBA v Wood [2016] VSC 264 and Commonwealth Bank of Australia v Doggett [2014] VSC 423 and, on appeal, Doggett v Commonwealth Bank of Australia [2015] VSCA 351. However, ANZ Banking Group Ltd v Fink [2015] NSWSC 506 did involve the incorporation of clause 25.1 into a customer’s loan agreement.
[36] At [132].
[37] Doggett v Commonwealth Bank of Australia [2015] VSCA 351 at [148].
In the present case, Mr Haynes complains that the Bank breached clause 25.1 in the manner by which it assessed Mr Haynes’ capacity to service the monthly interest expense payable with respect to the extended portfolio loan account. Mr Haynes also contends that the Bank breached its duty under clause 25.1 by failing to obtain a current valuation of the St Peters property as part of the process of assessing whether or not to grant the credit limit extension.
It is Mr Haynes’ case that, had the Bank properly exercised its duty in the first respect, it would have ascertained that Mr Haynes did not have the financial resources available to allow him to service the loan and that, on a true understanding of Mr Haynes’ capacity to service the monthly interest expense, the extended credit limit would have represented a financial accommodation significantly outside the Bank’s policy guidelines and one which it was wholly imprudent of the Bank to offer.
In addition, Mr Haynes contends that had the Bank acted with the appropriate care and skill it would have obtained an up to date valuation of the St Peters property which would have come in at significantly below the existing valuation of $1,600,000. The consequential recalculated loan to valuation ratio (LVR) would have fallen well outside the Bank’s prudential guidelines such that the extended credit limit would have been refused for this reason as well.
The Bank contends that, in all the circumstances, it did not fail to exercise the care and skill of a diligent and prudent banker as required by clause 25.1 in either of these ways. However, insofar as the issue of the St Peters valuation is concerned, the Bank also contends that clause 25.1 only imposes an obligation on the Bank with respect to its assessment of a customer’s capacity to service an ongoing financial facility provided by the Bank. Any complaint with respect to the Bank’s assessment of the adequacy of security available with respect to a financial facility provided falls outside the requirements or scope of clause 25.1. For the reasons which follow, I accept that submission. As a consequence, for Mr Haynes’ to succeed he needed to prove, inter alia, that the Bank failed to act in accordance with the requirements of clause 25.1 when assessing Mr Haynes’ capacity to service the extended facility. Whether or not the Bank was imprudent in allowing the extended credit limit on the basis of the value of the security thought to be available, will not avail Mr Haynes.
On its natural and ordinary meaning, clause 25.1 imposes a single obligation with two components. The Bank must exercise the care and skill of a diligent banker “in selecting and applying [its] credit assessment methods and in forming [its] opinion about [the customer’s] ability to repay it”. I agree with the submission put on behalf of the Bank that these two limbs are to be read as a compound proposition which serves to regulate the manner of assessment and ultimate formulation of the Bank’s opinion as to its borrower’s capacity to repay a loan.
The ultimate issue to which clause 25.1 is directed is the Bank’s opinion about the ability to repay. It is to the formation of this opinion that the selection and application of credit assessment methods is relevant. In other words, clause 25.1 is confined to the formation of an opinion concerning serviceability of a proposed loan. It is not directed to the Bank’s opinion as to whether or not a loan or financial accommodation should be advanced or to the various other criteria to which a Bank might have regard when deciding whether to, in fact, grant a financial accommodation including the additional protection a Bank might seek for itself as to the nature and level of security available. Clause 25.1 makes no reference to the question of security but only to credit assessment methods and an opinion as to ability to repay.
Further, the phrase “selecting and applying [its] credit assessment methods” is to be construed or understood in the context of the provision read as a whole.[38] Its content or ambit is informed by the ultimate expectation imposed on the Bank, that of exercising care and skill of a diligent and prudent banker in forming its opinion about the customer’s ability to repay the loan.
[38] Fitzgerald v Masters (1956) 95 CLR 420 at 437 (McTiernan, Webb and Taylor JJ).
The language of the clause when construed in this way is consistent with its evident purpose. In this respect, I agree with the following written submission put on behalf of the Bank.
The construction of clause 25.1 must also account for its commercial context and purpose. The evident purpose of the clause is to protect against imprudent or unfair lending practices that operate to the customer’s detriment. The purpose of the clause is to protect a customer who is not able to look after himself or herself. Absent such a protection, the lender may be content to lend on the basis of security alone [so called, “pure asset lending”].
This is to emphasise why the focus of the clause is upon the assessment of the capacity of the borrower to repay the loan, and why the assessment of security is outside the ambit of the clause. The former conforms to the consumer protection nature of the clause. The latter stands only for the protection of the bank. A lender that takes inadequate security does so to its own detriment rather than that of the customer.
The Victorian Court of Appeal in Doggett v Commonwealth Bank of Australia[39] had occasion to consider clause 25.1 in the context of a guarantee claim. McLeish JA (who dissented in the result but with whose reasoning in the following respect Wheelan JA agreed) observed that clause 25.1 does not presuppose or require that a bank must form an opinion that a borrower will be able to repay the loan but rather requires care in the formation of an opinion as to whether a borrower will be able to repay the loan. His Honour said this.[40]
A bank may take due care in forming an opinion as to whether a borrower can repay a loan and decide that, although it is possible that the borrower may not be able to repay the loan, it will offer the loan in any event. That may be, for example, because additional resources can be obtained by the borrower before the loan proceeds or during its term. Or it may be because other financial resources, not immediately available to the borrower, would in the event of a default be available to the bank (in particular by way of security or guarantee arrangement).
McLeish JA (with whom Wheelan JA and Garde AJA agreed on this point) went on to observe[41] that clause 25.1:
Does not prescribe a pre-condition to the advancing of a loan, or the content of the opinion which must be formed before that is done, only the level of care and skill with which the exercise must be undertaken.
[39] [2015] VSCA 351.
[40] At [163].
[41] At [164].
As a consequence, the Bank maintains that even if (which it denies) it failed to observe the requirements of clause 25.1 with respect to the assessment of Mr Haynes capacity to service the loan, liability in favour of Mr Haynes will not necessarily follow. Questions of causation of loss, including whether or not the extension of the portfolio loan account credit limit would have been granted in any event will need to be considered.
Observations concerning the witnesses who gave evidence on behalf of Mr Haynes
Mr Jonathon Haynes
Much of the evidence of significance to the Haynes Action was either documentary (correspondence, bank records and the like) or given by a witness with the assistance of notes and other written records. In many respects, the documentary trail tells the story as to how and in what circumstances the credit limit for the portfolio loan account was extended. However, there are aspects of Mr Haynes’ case, particularly in respect of but not limited to causation issues, where his reliability and credibility is of importance.
The evidence of Mr Haynes in chief and under cross-examination extended over a number of days. The following observations reflect the impressions I formed at the time of hearing Mr Haynes’ evidence. My subsequent review of the transcript has not caused me to depart from these initial impressions.

I found Mr Haynes to be an intelligent and shrewd man who has acquired, over some decades, substantial experience in and knowledge about his work in real estate sales and property development. He has been financially successful over the years. Whilst Mr Haynes would have the Court believe that he had no real interest in or understanding of taxation issues and the financial world, I am satisfied that he had a significantly more than reasonable working knowledge and understanding of those matters, at least insofar as they interacted with his real estate agency and property development work. He was not an abecedarian in these respects.
Mr Haynes impressed me as a person with a high tolerance for risk and who was prepared to conduct his business dealings and personal affairs with substantial reliance on borrowed funds.
Mr Haynes was relaxed and confident during his evidence in chief although, as to be expected, was not then tested or put under any pressure. However, I formed a poor view of his reliability and, ultimately, his credibility during his sustained cross-examination.
Mr Haynes was lucid and expansive but he repeatedly failed to focus on the content of questions asked. Instead, he routinely took the opportunity to restate and argue his case. It often was difficult to distinguish evidence of genuine recollection from reconstruction with the benefit of hindsight and reflection about what would be of most assistance to his case.
I was left with the firm impression that Mr Haynes had acquired an understanding of what he believed to be critical issues in his case and had schooled himself on certain topics which he repeatedly wished to impress upon the Court. This, of itself, does not mean his evidence was necessarily inaccurate. However, when challenged, rather than dealing with each question on its merits, Mr Haynes often retreated to his prepared speech.
Some of Mr Haynes’ evidence I found to be dishonest. Two striking examples are Mr Haynes’ evidence concerning his leasing of Longwood to Performa and his income tax returns and his evidence concerning how he would have behaved if the Bank had obtained an updated valuation of St Peters lower than the $1,600,000 valuation it relied on. I deal with the latter in some detail in my later discussion of causation of loss. As to the former, I am satisfied that Mr Haynes did not tell the truth concerning his knowledge of the fact that he had leased Longwood to Performa, his knowledge of the content of his tax returns as prepared by his accountant, as to the nature of the instructions he gave for their preparation and as to his understanding of the arrangements between himself and Performa concerning the “Flower Folly” business conducted at Longwood. Mr Haynes was cross-examined at length on these and related topics.[42] As a result of this cross-examination I formed a poor view of Mr Haynes’ frankness and credibility as a witness.
[42] T437-466.
Much of Mr Haynes’ evidence was not controversial, but where it was, ultimately, I have approached it with significant caution unless it can be seen to be consistent with or otherwise supported by contemporaneous records or other evidence in the case which I have accepted. Mr Haynes’ evidence, understandably, was given with the benefit of hindsight and, again, understandably, is largely to be seen as self-serving. Whilst not determinative as to reliability, these matters do give further reason for caution.
Some examples of where Mr Haynes’ evidence or approach to his evidence has caused me real concern as to his reliability and credibility are provided in the context of my later discussion of the evidence and findings of fact.
Ms Linda Ward
At the time of relevant events, Ms Ward was Mr Haynes’ business and domestic partner. However, they did not live together but in adjacent mirror image properties at 35 and 37 Player Court, St Peters. Ms Ward gave evidence on only very limited issues and, even if her evidence were to be accepted at face value, it could only be of marginal, if any, assistance with respect to the issues that divide the parties.
However, Ms Ward frankly acknowledged that she and Mr Haynes had discussed her recollections prior to giving evidence. She agreed that between when the dispute first arose in 2011 and the time she gave her evidence, she and Mr Haynes had discussed the case, including what took place in various meetings between Mr Haynes and the Bank and the nature of Mr Haynes’ case and evidence generally. Ms Ward conceded that she had difficulty in distinguishing between that which she could recall and that which was now her understanding as a consequence of discussions with Mr Haynes. For these reasons I have found Ms Ward’s evidence to be of no assistance by way of corroborating Mr Haynes’ evidence or otherwise.
Mr Robert Birt
Mr Birt has a number of graduate diplomas in business, banking and related areas. At the time he gave evidence he conducted a business as a finance broker. He gave expert evidence on behalf of Mr Haynes borne of his experience and expertise in banking.
Mr Birt’s positions have included Senior Manager, Major Client Group Bank of SA (2003-2009) and Senior Manager, Commercial Banking – CBD (1994-2003). He is a Fellow of the Australian Institute of Banking and Finance and an Accredited Member of the Finance Brokers Association of Australia. Mr Birt provided the Court with three expert reports[43] and was examined in chief and cross-examined extensively with respect to the opinions expressed therein.
[43] The first report was dated 5 August 2015 and dealt with serviceability issues (exhibit H5 - vol 3, tab 66). The second and third reports were dated 21 September 2015 and 22 September 2015 and dealt with matters concerning the adequacy of the security provided with respect to the extended credit limit for the portfolio loan account (exhibit H39 – two volumes).
I agree with the criticism levelled by the Bank in submissions to the effect that Mr Birt was, from time to time, argumentative and dogmatic. It became apparent to me, as Mr Birt’s evidence progressed, that he had persuaded himself or been persuaded of Mr Haynes’ case and was very reluctant to modify his opinions when confronted with analyses and factual propositions put by counsel for the Bank that demonstrated that, on occasion, Mr Birt had not been provided with a complete relevant factual basis or that tended to suggest Mr Birt had taken a position that was simply too inflexible. Mr Birt struck me as a banker who was particularly rules focussed. He demonstrated less capacity and willingness to respond to the practicalities of a situation as compared with other highly experienced bankers such as the Bank’s independent expert witness, Mr Bruce Debenham, Mr Pole and Mr Davy.
What became clear (but did not surprise me) from the evidence of Mr Pole, Mr Davy and Mr Debenham, was that decisions about potential transactions involving sophisticated business borrowers were not to be dictated solely by a financier’s standard lending policies and guidelines but required the weighing of risks and advantages or benefits and the exercise of judgment at various points in the process.
Without meaning in any way to decry the importance of a financial institution’s lending policies and guidelines promulgated in order to guide and control the manner by which employees assess and grant routine applications for finance, most such guidelines are just that and may give way, in suitable cases, as assessed by experienced senior bankers. I understood Mr Pole, Mr Davy and Mr Debenham to have these characteristics or approach to their work, whereas Mr Birt struck me as very rules focussed. Thus, when seeking to give me an understanding of what it might mean to exercise the skill and care of a prudent banker in the context of this matter, Mr Birt tended to focus on the Bank’s policies and rules and was resistant to allowing for their flexible operation in the hands of a competent and experienced senior banker.
In addition, Mr Birt had left his role as a Senior Manager with BankSA in 2009 on quite bad terms. He acknowledged that, at that time, he harboured significant ill-will towards the Bank. However, he denied that this may have had an effect on his evidence. Nevertheless, I was left with a real concern that Mr Birt’s natural tendency to inflexible conservatism in the manner I have earlier described, his previous ill-will towards the Bank and his dogmatic support of Mr Haynes’ case, conspired to effect a clouding of his professional judgment. I would not go so far as to say that Mr Birt was a barracker, but I am not convinced that he exhibited a proper appreciation of his role as an independent expert to assist the Court rather than to argue for a client’s case.
I am satisfied that Mr Birt has considerable experience and expertise as a banker generally and in the methods of assessing and approving applications for finance both at domestic and commercial level. Nevertheless, for the reasons I have given, I have treated his evidence with caution. I found the Bank’s independent expert witness, Mr Debenham and Mr Pole and Mr Davy to be more impressive in terms of their capacity to explain and justify a flexible, application of rules and policies to specific factual situations on a case by case basis, to more readily make concessions in their own evidence and, ultimately, to be of more assistance. That is not to say that Mr Birt’s evidence was of no assistance, it was and particularly so once, often after extensive exploration of his evidence, he was prepared to make concessions during cross-examination.
Ultimately, Mr Birt did agree that judgment calls are routinely made if there is a business case in support of a divergence from a financier’s lending rules and policies, provided that a proper assessment is made of the various risks relevant to the Bank’s exposure. In other words, even though a transaction may not fit within the standard guidelines and policies relevant to a loan of that particular nature, in the hands of an experienced banker it might still be regarded as “bankable”. Mr Birt also made a number of specific concessions. The Bank, in its final submissions, has identified the following as matters conceded by Mr Birt. I have reviewed the evidentiary references said to be in support of the concessions and I am satisfied that they properly reflect Mr Birt’s evidence in these respects.
(i)There is nothing unusual about full-time property developers using sales of investment properties in company names to service facilities.
(ii)It was a relevant consideration when assessing Mr Haynes’ application in 2009 that he enjoyed a history of having taken out performing loans, including in relation to properties owned by companies he controlled.
(iii)One option employed to cover the period when a customer acquires a second property and has not yet sold the first is a bridging loan involving capitalisation of interest.
(iv)A bridging loan in the circumstances underlying Mr Haynes’ application to extend the existing portfolio loan facility was eminently bankable.
(v)Mr Birt’s reference in his written report to the inclusion by the Bank of $86,500 of commissions when assessing capacity to service the credit limit extension as being “inexplicable”, was not appropriate.
(vi)Contrary to Mr Birt’s observation in his first report, the commission income as recorded and relied on by the Bank when assessing serviceability was, in fact, reconcilable with Mr Haynes’ own projections.
(vii)When expressing his initial view that it “beggared belief” to include rental income for a borrower’s owner occupied property Mr Birt had assumed that Mr Haynes would still be residing in the property at this time. Mr Birt accepted that it would be different if the intention of Mr Haynes was to move into the Longwood Property leaving the St Peters Property available for rent and where there is a panel valuation that supports the rent adopted by the Bank.
(viii)It would be sensible for a banker to assess, as a risk mitigant for the situation where a property does not sell within an ordinary marketing campaign, the rental income available for the period during which the property might continue to be held. Further, on the assumption that there had been discussions between the banker and customer regarding letting of the property, this would be something a banker would take into account.
Mr Sam Christodoulou
Mr Sam Christodoulou is an experienced real estate valuer who has been in private practice as a valuer since 1975. Prior to that, Mr Christodoulou worked with the State Government. Mr Christodoulou provided expert valuation reports for 37 Player Court, St Peters (Mr Haynes’ residence) as at a number of dates[44] including as at October 2009. I had no cause to doubt Mr Christodoulou’s experience, professionalism and objectivity.
Brief observations concerning the witnesses who gave evidence on behalf of the Bank
[44] Report dated 14 August 2015 (a number of paragraphs of which were received de bene esse as indicated in the transcript at p813-814), report dated 19 August 2015 and report dated 24 September 2015 (again, subject to one paragraph taken de bene esse, see transcript at p814), exhibits H31, H32 and H33 respectively.
Mr Christopher Pole
At the time of the relevant events, Mr Pole was a senior and experienced banker. He commenced working for the NAB in Victoria in 1972 and stayed there until September 2005. He started as a junior clerk and progressed through more senior roles to become a Manager of various bank branches, an Assistant Regional Manager and then a District Commercial Manager. In 1996, Mr Pole transferred within the NAB to Adelaide and served as an Area Manager for Business Banking. In this role he was responsible for approximately 16-18 business banking centres and supervised 30 or so bankers who would submit lending applications to him for his consideration.
Mr Pole left the NAB and took up employment with BankSA in December 2006. He assumed the role of Senior Manager of the Major Client Group with his own delegated lending authority of up to $2,000,000. I am satisfied that Mr Pole, during the period he was dealing with Mr Haynes’ account with BankSA, was a very experienced and a competent senior banker.
At the time Mr Pole gave evidence, he had left the Bank and was working in Sydney. As such, he gave his evidence from a position of independence from the Bank. Mr Pole had limited direct recollection of day to day events and day to day discussions with and concerning Mr Haynes. However, in accordance with his usual practice, he had kept quite detailed diary notes and prepared other detailed bank records. It was his practice to make these notes at times relatively contemporaneously with the events recorded. I am satisfied that Mr Pole had also developed, over many years, a fundamental set of practices as to how he went about his business when considering and approving applications for finance.
Mr Pole gave his evidence largely with the assistance of his contemporaneous notes and other bank records and in reliance on his practices. I am satisfied that Mr Pole was attempting to assist the Court rather than, necessarily, the Bank’s case although it is not to be overlooked that he would have had a natural desire to justify the professional decision making that he engaged in at the time. I have no reason to think that Mr Pole did not give his evidence honestly. He was prepared, at times, to make concessions and to accept propositions that may be seen as offering some support to Mr Haynes’ case. He gave his evidence carefully and, in general, I have accepted it as reliable.
Mr Paul Davy
Mr Davy commenced working with the Savings Bank of South Australia in about 1978. Between 1989 and 1991 he was Manager of Corporate Banking at the State Bank of South Australia in Sydney. Thereafter, he assumed roles of Manager of Corporate Banking at the State Bank of South Australia in Adelaide and Senior Manager – Credit for BankSA in Sydney, State Credit Manager of Queensland for BankSA and Head of BankSA Credit Inspection. As early as the mid-1990s, the total bank lending exposure under his control was of the order of $350,000,000. I am satisfied that in these various roles, Mr Davy assumed responsibility for and developed significant experience in high level commercial and consumer lending approval and review of loan proposals.
From September 2000 to 2013 he was Executive Manager, Risk and Compliance with BankSA with a lending discretion in the order of $75,000,000. In addition, he was empowered to approve departures from policy guidelines and requirements governing circumstances in which loans will be granted.
As with Mr Pole, I am satisfied Mr Davy was a highly experienced and competent banker. He was an impressive witness and I accept that he was a reliable and honest witness. He made concessions as and when appropriate including concessions from time to time about matters not necessarily supportive of the Bank’s case. Mr Davy also had a limited independent recollection of detail. Nevertheless, I found his evidence to be of assistance generally as to the nature of prudent banking practices and as to the banking practices that were employed by himself and Mr Pole during the period of time that Mr Haynes’ financial accommodation was under consideration.
Mr Bruce Debenham
Mr Debenham was called on behalf of the Bank as an independent banking expert. Mr Debenham has an extensive curriculum vitae. From 1988 to 2000 he worked in corporate insolvency with Arthur Anderson (United Kingdom) and then PricewaterhouseCoopers (Adelaide). From 2000 he moved to the NAB working in various very senior positions. Between July 2005 to May 2008 he held the position of Head of Credit South Australia and Northern Territory for the NAB’s business and private banking. Thereafter, Mr Debenham was the NAB’s head of risk for South Australia and Northern Territory.
I found Mr Debenham to be a very experienced and competent banker. He presented well as an expert witness. He focussed carefully on the questions that were asked both in examination in chief and in cross-examination and provided deliberate and thoughtful answers. I accept that he gave impartial evidence. He too was prepared to make concessions and to qualify his evidence appropriately particularly under cross-examination.
Ultimately, the question of whether or not the Bank exercised the care and skill of a prudent banker in the sense required by clause 25.1 of the Code is a matter for the Court. In many respects, the conduct of the major protagonists, in particular Mr Haynes, Mr Pole and Mr Davy, involved practical and common sense steps taken with respect to not particularly sophisticated financial matters. As such, even in the absence of expert assistance one would expect a judicial officer to have little difficulty in understanding the nature of and the risks associated with the decision making process undertaken by the Bank at the time it agreed to increase the credit limit for Mr Haynes’ portfolio loan account. Nevertheless, I found both Mr Birt and Mr Debenham to be of assistance in educating me as to the various considerations to be taken into account in order to determine whether clause 25.1 had been observed by the Bank.
Whether or not the expert witnesses, Mr Birt or Mr Debenham, would have conducted the analysis undertaken by Mr Pole and Mr Davy in the same way and arrived at the same or a different conclusion is not itself determinative.
Mr William Waterhouse
Mr Waterhouse is a certified practising property valuer and Director of Valuation and Consulting at Herron Todd White. Herron Todd White is a firm of specialist valuers for various purposes including banking, financial, legal and accounting purposes. Mr Waterhouse is a Fellow of the Australian Property Institute and has more than 30 years experience as a property valuer. He provided a valuation for 37 Player Court, St Peters as at July 2009[45] and also reported on other matters relevant to the valuation. Like Mr Christodoulou, I found Mr Waterhouse to be highly experienced and competent as a domestic real estate valuer. I have no reason to think that his evidence was given other than honestly and like with Mr Christodoulou, subject to the assumptions he was asked to adopt, reliably.
[45] Exhibit B35 being an undated report in response to instructions provided by the Bank’s solicitors in October 2015.
Phillip Greatbatch

As I have said on a number of occasions, Mr Haynes was not in any sense risk averse. He operated over many years in a volatile business environment, volatile in the sense of his having to rely on large sporadic income flows to a degree unpredictable as to timing and amounts, rather than on predictable and regular income flows. He had committed himself personally, albeit secured over real property, to ongoing debts in the order of $6,500,000 to bank lenders over a number of years. He organised his business and personal financial affairs through various complex financial arrangements involving direct personal liability and guarantee arrangements in support of multiple corporate borrowers. He was not adverse to spreading his business over more than one financial institution or to moving his business if he could secure more favourable terms; he moved only part of his business from NAB to the Bank in 2007, contemplated, in January 2009, moving part of his business to Westpac and had a facility with Bankwest in respect of property dealings by the Hayward Corporation.
Mr Haynes understood and was quite familiar with the notion that interest falling due on a loan might be capitalised in order to take account of cash flow considerations. In his experience and given the size of the portfolio loans he was involved with, capitalisation of interest for up to a year was not a matter of concern.[116] Indeed, this was an important component of Mr Haynes’ business model – borrow to highly gear a project and if the interest has to be capitalised that is just an expense to be paid off at the time the project comes to fruition.
[116] T153.
That Mr Haynes was untroubled by risk and confident that the Longwood purchase would proceed satisfactorily in any event is evident from the following.
(i)He executed the Longwood contract unconditionally, in particular, neither subject to finance nor the sale of St Peters.
(ii)He negotiated a long settlement, in part, to permit time to sell North Street and McGregor Close preparatory to obtaining the necessary finance.
(iii)Mr Haynes made no attempt to obtain finance, indeed no overtures in this respect until some months after signing the contract.
(iv)Mr Haynes, rather than taking advantage of the long settlement period to market St Peters, was not concerned to commence to market St Peters for sale until early 2010 months after having settled on Longwood.
Had, for any of the reasons advocated by Mr Haynes, the Bank been confronted with a CCR or an LVR sufficiently outside its policy guidelines as to cause it to refuse the portfolio limit extension sought, Mr Haynes would have been faced with these possibilities.
(i)To default on Longwood, give up on the retirement plan and face the loss of deposit and a potential damages and contractual interest and costs claim.
(ii)To “flick” the Longwood contract, that is, as I understood Mr Haynes’ use of this term, to assign the contract on terms that would enable Mr Haynes to satisfy his unconditional obligations to the vendor. There would be obvious timing and practical difficulties together with financial risks attached to this option.
(iii)To further negotiate with the Bank with a view to obtaining the finance on either the same or different (more satisfactory to the Bank) terms.
(iv)To seek finance from another lender.
It would have been open to Mr Haynes to renegotiate the settlement date with the Longwood vendor, as Mr Haynes himself recognised, if he needed more time to achieve either (iii) or (iv). According to Mr Haynes he had “a very good relationship with the vendor at the time”. Given, according to the evidence of Mr Greatbatch: the length of time that Longwood had been on the market (12 months); that Mr Haynes’ offer of $850,000 was some $150,000 less than the asking price and was the only anywhere near sensible offer received during that time; that the vendor whilst “wishing to sell quickly” had been prepared to agree to a ten month settlement; the self-evident truth of the proposition, as Mr Greatbatch put it, that the property was “a flower farm with an enormous number of bulbs in the ground and it is not everybody that wants to come forward and buy a property that requires a lot of hand work …”; and the fact that few vendors are keen to enter into a dispute with a defaulting purchaser if it can be avoided, the prospects for Mr Haynes obtaining an agreed extension of the settlement date were more than likely very good. In addition, for the same reasons, had Mr Haynes gone into default and the vendor been forced to resell, the risk that Mr Haynes would face a substantial damages claim following a loss on resale would have been high.
For my reasons thus far, I reject Mr Haynes’ evidence that he would have proceeded, in effect, without demur, to options (i) or (ii). His evidence on this topic, repeated mantra like, was plainly self-serving given with hindsight. It was, in my opinion, disingenuous and untrue. I am quite satisfied, on balance, that Mr Haynes would have proceeded to (iii) and then, if necessary, to (iv) after, if necessary, negotiating an extension of the settlement date.
As for (iv), there is no evidence concerning what other financing alternatives would have been available in the wider market either from so called first tier lenders such as the major banks or lower tier lenders. Should any such finance, as may have been available, have involved more restrictive conditions including, in particular, a higher interest rate, such would have been of little, if any, moment to Mr Haynes given the short period he expected to hold both properties and his lack of antipathy to capitalising interest if necessary. There being no evidence, I am unable to make a finding as to what financing options may have been available to Mr Haynes from other sources. However, the fact that the financing arrangement with the Bank, as originally sought, fell outside the Bank’s guidelines (on Mr Haynes’ case) does not establish that finance would not have been obtainable from elsewhere if necessary. Mr Haynes, who bears the onus, has not established that he would not have sought finance from another lender and that finance on terms acceptable to Mr Haynes would not have been available.
In any event, Mr Haynes would not have needed to make enquiries outside the Bank. I am satisfied that finance would ultimately have come from the Bank, on different terms, if necessary, but being terms that Mr Haynes would have been willing to accept if that was all that was on offer, that is, option (iii) above.
The transaction was in substance, in the nature of bridging finance. It could have proceeded if structured formally as a bridging loan. Mr Debenham saw the transaction as, in substance, a bridging loan and assessed its advisability in that context. Ultimately, Mr Birt accepted that a bridging loan, in the circumstances, was “eminently bankable”. He gave this evidence.[117]
[117] T526.2-527.17.
QNo, I said somebody comes into the bank, they say 'I've got a property worth $1.6 million.'
AYes.
Q'And I'm looking to buy a property that's worth $850,000.'
ACorrect.
Q'And I'm going to sell my first property. I'm going to put it on the market say straightaway, say a month or two after, say three months after, but I'm going to put it on the market once I've tidied up the new property and once I sell my first property I'm going to use 100 cents in the dollar of that property to retire debt and my expectation is at the conclusion of that process my indebtedness will be $100,000 or $200,000 as against a property that I'm buying now for $850,000.' That wouldn't present any issue at all in terms of bankability would it.
ANo, no. I suppose the only risk is that the first property, the property to be sold doesn't sell and the interest clock just keeps running and the surplus that was anticipated is eroded.
QAt 5% per annum it's a long road before that surplus is eroded isn't it.
AIt is. But still there's a risk that the property doesn't sell for a variety of reasons.
QIt's eminently bankable isn't it.
AIt is.
QNow in terms of the facilities at BankSA while you were there bridging loans were available on a six-month basis or a 12-month basis.
AYes, yeah, they were.
QAnd open to credit to make them available for longer.
AYes.
QAnd open to a banker to say 'Effectively I've got someone here that's going to take their property worth 1.6 and convert it into a property that they're buying for substantially lower value and use all the proceeds to repay the debt therefore I want credit to be able to have some flexibility in the terms of any bridging type facility.' It's eminently bankable isn't it.
AIt is, but again that $1.6 million property if it doesn't sell, you know it's the high end of the market, it doesn't sell within a reasonable timeframe then there may be an exposure that you don't want.
QHow many years do you estimate before that exposure becomes a problem at an interest rate of just over 5%.
ALook, I just can't make that calculation at the moment.
QAt a borrowing of 1.8 million at 5% 90,000 per annum.
A90,000.
QIf you would lend at 80% of 850,000 you're lending 650 on it.
ACorrect.
QYou've got a lot of years haven't you.
AYou have, yeah.
Bridging finance from the Bank would have been available. Typically bridging finance will overcome any serviceability difficulties. Many people cannot afford to service the interest expense on two mortgaged residential properties even for the relatively short period before one of the properties is to be sold and the bridging loan paid out or substantially reduced. Typically, the increased interest expense will be capitalised for the period of the bridging loan. If required, and particularly where LVR requirements will not be met for the period of the bridging loan, Lenders Mortgage Insurance (LMI) can be arranged to provide added protection for the lender.[118]
[118] Exhibit B58, T1248.11-1251.19.
On Mr Pole and Mr Davy’s evidence, bridging finance could have been made available to Mr Haynes even if the extension of the portfolio loan would not have been available either because of a concern about Mr Haynes’ capacity to service the interest expense for the bridging period or because the LVR during that period would exceed 80 per cent and be beyond the Bank’s policy guidelines for that type of loan – or both reasons. The evidence adduced by the Bank demonstrates that LMI, through the Bank’s wholly owned mortgage insurer,[119] could have been arranged upon payment of a one-off premium in the order of $25,000 (inclusive of stamp duty).[120] The terms of the policy[121] permit the premium and stamp duty to be added to the loan principal, in effect, capitalised. This together with the capitalisation of interest (if necessary[122]) would have had a further adverse effect on the LVR but the whole purpose of the LMI would be to accommodate LVR difficulties for the short term.
[119] St George Insurance Australia Pty Ltd.
[120] Given a valuation of St Peters, assumed for the purpose of this exercise, of $1,300,000.
[121] Exhibit B58, clause 22.8.4.
[122] As it happens, Mr Haynes demonstrated a capacity to service month to month, the total interest expense for the first 12 months of the loan.
Mr Haynes said that he would not have been interested in bridging loan finance had that been the only means available for Longwood to proceed. Mr Haynes gave reasons for why he would not be prepared to proceed with LMI which do not withstand scrutiny.
Initially, Mr Haynes expressed concern about having to pay an extra $25,000 or so. However, after being pressed at length, he ultimately conceded that if this figure were to be capitalised he would consider the amount to be inconsequential in the context of the size of the portfolios he was carrying. Mr Haynes’ primary concern was that if LMI became necessary, it would be so because the Bank had valued St Peters at materially less than $1,600,000 giving rise to a consequential unacceptably high LVR. This would have operated as a “red flag”. The following exchange occurred during cross-examination.[123]
[123] T1498.17-1501.33.
QIn terms of the red flag, you knew at that time that the loan valuation ratio was going to be increased for the confined period when you were still holding both St Peters and Longwood. That was something you understood at the time.
AYes.
QIt's a necessary consequence I suggest of the fact that you're borrowing 100% of Longwood. It inevitably means your loan to valuation ratio is increasing for the period that you are holding both Longwood and St Peters.
AYes.
QThat was something you understood.
AYes.
QIt was increasing as you understood matters above the 70% that you were carrying before the purchase of Longwood but on the expectation that on the sale of St Peters it would be decreasing.
AYes.
QSo in terms of any red flag, and the effect that was going to have on you, you understood it was a short-term effect only.
ANo, because the red flag would alert me to the fact that perhaps St Peters isn't worth the 1.6 and then no matter - if St Peters was only worth 1.3 or 1.1 or whatever it was worth, my loan to value ratio at the end of the transaction process and the four things that we've all heard about, I would have a seriously large debt on a farm in Longwood that, I'm sorry, I wasn't even entertaining. The impression or the whole outset of this arrangement was to have negligible debt so that I could semi-retire. I wasn't going to go up there and have a large debt that required additional work. So if the red flag as you say was brought about by a question of value, then I wouldn't have gone forward with the transaction, it just wouldn't have happened.
. . . .
QPerhaps coming at it another way, is the only concern you are expressing about lenders mortgage insurance, that it was signifying to you that a revaluation of St Peters had been done for less than 1.6 million.
AIt would alert me to the fact that the bank is considering that asset to be worth less than 1.6, yes.
QWas there anything else about the lenders mortgage insurance that would have been troubling you.
AOh a $30,000 premium would bother me, and you'd argue that by saying if you amortized it over the term of the loan. I accept that argument.
For the reasons already given, I do not accept Mr Hayne’s evidence to the effect that a lower valuation of St Peters would have posed a red flag which, for the reason given by Mr Haynes, would have caused him not to proceed even with bridging finance and LMI. The position can be summarised as follows.
(i)The Bank’s valuation of St Peters, as far as Mr Haynes was concerned, was merely part of the process that had to be navigated in order for Mr Haynes to obtain the finance he wanted. Given Mr Haynes’ state of mind in 2009, the Bank’s valuation was not a consideration material to Mr Haynes’ thinking and his opinion that his retirement project involving the acquisition of Longwood was sound. His evidence that the obtaining of a lower valuation by the Bank would have concerned him as to the fact rather than simply as presenting an impediment to his plans, was disingenuous.
(ii)In other words, Mr Haynes’ own view of the market in 2009 and, in particular, of the value of St Peters and his belief that he had acquired Longwood at a substantial discount to its market value,[124] would have dictated Mr Haynes’ approach.
(iii)Mr Haynes had a substantial appetite for borrowing large sums of money in order to make money or otherwise secure financially advantageous positions for himself.
(iv)Mr Haynes was not risk averse; he had the temperament and experience that encouraged him to proceed with large financial transactions notwithstanding attendant risk.
(v)The cost of the LMI premium and the stamp duty was relatively low in the scheme of things – in absolute terms, inconsequential – and a small price to pay to avoid the forfeiture of the $10,000 deposit and the risk of becoming liable for unpredictable (and perhaps substantial) damages, contractual interest and costs, and in order to secure the greatly desired outcome of realising the retirement plan.
[124] And notwithstanding the, in my view, irrationality of this view concerning the Longwood price, given Mr Greatbatch’s evidence.
These matters considered in combination persuade me, more likely than not, that if it became necessary, the Bank and Mr Haynes would have restructured the funding arrangement to enable the Longwood purchase to proceed as a bridging loan and that Mr Haynes would have accepted the less favourable conditions.
Mr Haynes also said that he would not have been interested in bridging finance because such finance typically comes with a restricted timeframe, say six months, during which the Bank required the second property to be sold. However, any such imposed timeframe would have been negotiable.[125]
[125] See the evidence of Mr Birt earlier.
Further, even if restricted to six months, this still would have been a substantial period within which to effect a sale of St Peters and an adequate one in the context of Mr Haynes’ then state of mind. There would be no question of Mr Haynes and his son having to move from St Peters before the son had finished the school year. Finally on this point, Mr Haynes’ state of mind in October 2009 would have been that even if St Peters were not to sell within the six month period or such longer period as may have been negotiated, the loan would have been in place and the sale process underway. Any further delay before being able to discharge the bridging loan would have been relatively brief. I am not persuaded that the more restrictive conditions that would come with a conventional residential bridging loan would have dissuaded Mr Haynes from proceeding.
Conclusion as to causation of a compensable loss
Mr Haynes has not proved that, even if the Bank had breached the clause 25.1 warranty, the necessary finance would not have been made available by the Bank or some other financier and accepted. He has not established that the Longwood purchase would not have proceeded. On Mr Haynes’ case as to breach, no compensable loss has been proved and his claim is to be dismissed for this reason as well.
Assessment of any compensable loss
In the event that I were to be in error, to this point, as to breach and causation of compensable loss such that, on Mr Haynes’ case, the finance necessary to complete the Longwood purchase would not have been forthcoming, the question of how to assess Mr Haynes’ damages would arise.
I agree with the Bank’s submission to the effect that Mr Haynes will have suffered no direct loss in the sense that Mr Haynes, at the time of accepting the Bank’s extended facility, received full value in exchange for the obligation to repay the principal amount drawn down in order to settle Longwood. The amount drawn down would, in any event, remain payable and have to be accounted for in any damages assessment.
However, Mr Haynes would be seen to have incurred consequential losses which would not have been incurred but for the fact of the finance having been made available and the Longwood purchase completed. Mr Haynes has pleaded an entitlement to be compensated for various categories of such consequential expenditures and other losses.
Mr Haynes used the drawn down advance of $850,000 plus an amount for transaction costs in order to complete the Longwood purchase. As at that point in time, Mr Haynes acquired property with a value equal to his debt obligation to the Bank, apart from the additional amount drawn down for transaction costs. However, whilst Mr Haynes also received full value (the drawn down funds) for his assumed obligation to repay the money advanced to fund the Longwood settlement transaction costs, these costs were wasted. Mr Haynes has received nothing tangible and would not have incurred these costs or the debt to the Bank. I do not accept the Bank’s contention that the wasting of the advance for the transaction costs would not have been caused by the breach; those amounts would be recoverable by Mr Haynes.

Further, the interest debt incurred with respect to the portfolio loan extension together with the Bank’s legal costs of recovery would not have arisen and Mr Haynes’ assessable consequential losses would include these amounts, to be offset against the Bank’s claim.
As far as the FDA is concerned,[126] it is true that Mr Haynes would not have needed to obtain this loan and would not have become liable to repay it had the Longwood purchase not proceeded. However, he did receive the $130,000 advance and obtained full value for incurring the obligation to repay it. He would remain liable to reimburse the Bank this principal amount. However, the interest debt incurred and the Bank’s legal costs of recovery would not have arisen. Mr Haynes’ assessable consequential losses would include these amounts to be offset against the Bank’s claim.
[126] $50,000 on 9 March 2010 extended by $80,000 to $130,000 on 21 January 2011.
Mr Haynes also claims counsel rates and other outgoings expended with respect to Longwood in the amount of $17,400 and costs of insurance in the amount of $14,832 on the basis that these sums would not have been spent but for the purchase of Longwood. Subject to the fact of the amount of these expenditures having been proved, they prima facie would be recoverable. However, Mr Haynes’ received value from these expenditures during the period of time in which he held Longwood and the value to Mr Haynes would need to be accounted for in any assessment of loss. There is no reason to think Mr Haynes did not receive full value which would serve to offset these expenditures if proved to have been made.
The same analysis applies with respect to Mr Haynes’ claim for recovery of an amount of $20,000 spent on improvements at Longwood. Again, Mr Haynes will have received value for these improvements even if it only be an increase or an adjustment in some way to the value of Longwood and notwithstanding that, ultimately, Longwood was sold at a loss. There has been no attempt to quantify the value received in this respect and as such it cannot be assumed that it did not match the expenditure.
Mr Haynes also claims as part of his assessable loss, money spent on improvements to the St Peters property when preparing it for sale in the amount of $20,000, marketing and advertising costs spent in the process of selling St Peters in the amount of $20,000, the real estate commission of $33,000 paid as a consequence of the sale of St Peters and “likely future damage on re-entering the property market in the form of stamp duty on a future purchase [of a $1,600,000 property] in the amount of $81,830”. I agree that the marketing and advertising costs and the commission on the sale of St Peters are sums that were truly thrown away and should be recoverable by Mr Haynes. For the same reasons given with respect to the improvements made to Longwood, I am not satisfied that Mr Haynes did not receive full value for the expenditure of $20,000 said to have been incurred for improvements to St Peters. I agree that, had the purchase of Longwood not proceeded, it would have been unnecessary for Mr Haynes to sell St Peters. I also agree that, as a matter of principle, Mr Haynes is entitled to be restored to the position he would have been in had this not occurred and had he thereby retained St Peters. Of course, Mr Haynes would still have been liable to the Bank for the balance of the portfolio loan account immediately prior to the draw down in October 2009 and, on the evidence provided at trial, the value of St Peters at that date was more likely than not something less than $1,600,000. Using a broad axe, I would allow Mr Haynes an amount of $80,000 by way of placing him in funds sufficient to meet the costs of acquiring a new “St Peters” including the costs of stamp duty and other incidental costs of acquisition.
In addition to the pleaded losses, Mr Haynes has identified other losses during his final submissions.
Mr Haynes claims that the mortgage in its pre-October 2009 form would have been serviced. However, Mr Haynes has had to pay rent having lost the use of St Peters. As a consequence, Mr Haynes claims rent at $800 per week (the Bank’s figure) from a nominated starting point of 2013, totalling (over three years) $124,000. Mr Haynes claims this amount as representing his loss of use of St Peters, given that the actual rent he expended for his rental property after having sold both St Peters and Longwood was not evidence. Mr Haynes had Longwood available to him until its sale in August 2015. Mr Haynes has not established a proved loss under this heading. In my view, the loss of use of St Peters in the manner characterised by Mr Haynes is not convincing.
Apart from identifying certain specific expenditure amounts said to have been incurred, Mr Haynes has not attempted to assist the Court in quantifying the amount of his loss. In the event that various of Mr Haynes’ heads of loss were to be allowed an accounting would need to be undertaken. Presenting further difficulty in this respect is the fact, as submitted by the Bank which submission I accept, that Mr Haynes has not attempted to allow for a number of offsetting benefits. I agree with the Bank’s submission that for this reason Mr Haynes’ allegation of loss are largely speculative. The Bank submits the following matters should also be taken into account by way of offsetting any claim by Mr Haynes for consequential losses.
(i)The value to be ascribed to his exposure to a claim for damages by the vendor of the Longwood property, including as to their consequential losses for the period of time that the vendors would have been kept out of the purchase price. As earlier identified in these reasons, Mr Haynes would have been exposed not just to the loss of the $10,000 deposit but to a claim for contractual interest on the purchase price outstanding, damages in the event that the property was re-sold for less than $850,000 and the vendor’s legal costs.
(ii)There would be further likely consequences for Mr Haynes following a breach of the Longwood contract which would need to be taken into account. Any damages and costs awards payable to the vendor would need to be funded at a cost to Mr Haynes and any legal costs incurred by Mr Haynes in defending or otherwise addressing the vendor’s claims would need to be accounted for. I agree with the Bank’s submission that in circumstances where there were to be material delay for the vendor in affecting a sale (and bearing in mind that the period between commencing to sell Longwood and ultimately settling the sale to Mr Haynes was almost two years) there is a material prospect that the total cost to Mr Haynes occasioned by failure to perform the Longwood contract would have been quite significant.
(iii)It would appear that Mr Haynes derived tax deductions year on year from the lease of the Longwood property to Performa, disclosed in his 2010 and 2011 tax returns.[127] This benefit would not have been received had the transaction not proceeded and would need to be accounted for.
(iv)Performa (owned at 50 per cent by Mr Haynes) conducted the business of Flower Folly from Longwood. The profits, if any, of which have not been identified in the evidence but would need to be offset against Mr Haynes’ claim for damages.
(v)Taxation benefits, it would appear, would also have been derived by Performa in respect of the rent paid[128] and as a consequence of such matters as depreciation of improvements on the property.[129] These also would have benefited Mr Haynes as a 50 per cent owner and would need to be taken into account.
(vi)Mr Haynes acquired, in addition to the real property at Longwood, various chattels associated with the purchase of Longwood.[130] There has been no attempt by Mr Haynes to explain what has happened to these chattels or to account for them.
(vii)Mr Haynes has made no payments with respect to his borrowings from approximately September 2010 to date.[131] As such, he has had the benefit of the funds representing the increased portfolio loan from October 2009. I agree with the submission by the Bank that even though interest has been sought by the Bank in respect of the use of those funds, this does not alter the fact that for a number of years the Bank’s funds were deployed by Mr Haynes in one fashion or another in his various operations and property development activities. I agree with this submission.
If Mr Haynes was to analyse consequential loss in a conventional fashion, any benefits derived from him by his use of funds would need to be brought to account and the Bank would need to be afforded appropriate scrutiny including thorough disclosure of the nature of those dealings.
(viii)Mr Haynes for a number of years had the benefit of the Longwood property as his residence and would need to account for the financial benefit to him for having the use of that property.
[127] Exhibit B23 and exhibit B22 respectively.
[128] Exhibit B2, tab 17.
[129] Exhibit B24.
[130] Schedule of Plant and Equipment annexed to the Longwood contract – exhibit H5, tab 7, p90.
[131] Exhibit B2, tab 17.
For the reasons I have briefly set out, the Court is not in a position to assess the net consequential loss that Mr Haynes would have suffered had the purchase of Longwood proceeded as a consequence of, that is, as caused by the Bank’s wrongful conduct. One possible approach, had I been in favour of Mr Haynes’ case as to liability and causation, would be to refer the matter to a Master in order to receive further evidence and submissions to enable that Master to undertake an accounting with respect to the various categories of losses and benefits incurred and received by Mr Haynes said to have been relevant to the assessment. However, the Bank has submitted that Mr Haynes has failed to discharge the onus on him to prove his consequential losses, in that he has not pleaded or proved the position he would have been in had the loan not proceeded. As such, the Bank submits that the Haynes action should be dismissed for this reason as well.
In the event that the situation were to arise such that an assessment may have to be attempted, the parties would need to be heard further as to how to proceed.
Contributory negligence
Until relatively recently, damages for breach of a contractual duty to take reasonable care were not apportionable on account of contributory negligence.[132] Amendments to the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 have modified that position. Sections 4 and 7 of that Act now provide as follows:
[132] Astley v Austrust Ltd (1999) 197 CLR 1.
4—Application of Act
(1)This Act applies to liabilities of the following kinds—
(a)     a liability in damages that arises under the law of torts;
(b)     a liability in damages for breach of a contractual duty of care;
(c)     a liability in damages that arises under statute.
(2)This Act—
(a)     has no effect on criminal proceedings; and
(b)     does not make enforceable an agreement for an indemnity that would not have been enforceable apart from this Act; and
(c) does not apply to liability subject to apportionment under section 72 of the Development Act 1993.
...
7—Apportionment of liability in cases where the person who suffers primary harm is at fault
(1)If contributory negligence contributes to (but is not the sole cause of) the harm for which a claimant seeks damages, the claim is not to be defeated on the ground of the contributory negligence.
(2)If a claimant's harm is caused partly by another's negligent wrongdoing and partly by contributory negligence, the court must proceed as follows:
(a)     the court must determine (and record) the amount of the damages to which the claimant would have been entitled assuming there had been no contributory negligence; and
(b)     the court must then reduce the amount so determined to the extent the court thinks just and equitable having regard to the extent the contributory negligence contributed to the harm.
(3)This section applies subject to—
(a)     any contractual modification, exclusion or limitation binding on the claimant or, in the case of a claim for damages for derivative harm, on the person who suffered the primary harm; and
(b)     any statutory modification, exclusion or limitation.
(4)In this section, a reference to contributory negligence extends, in the case of a claim for derivative harm, to negligence on the part of the person who suffered the primary harm.
In my view, the language of the Act makes it clear that the potential for contributory negligence to apply where there has been a breach of a contractual duty of care arises even if that contractual duty is not concurrent with a tortious duty of care. In other words, the potential for contributory negligence to arise applies to the present case even though the Bank would be liable only with respect to its contractual obligation but not with respect to a tortious obligation. The Second Reading Speech delivered when the amendments were enacted makes it plain that the South Australian Parliament intended this consequence.
The Bill will ... allow the courts to reduce the plaintiff’s damages on account of his or her contributory negligence in any case of a breach of a contractual duty of care, subject only to any agreement between the parties of any other legislative provision to the contrary.
. . . .
As the new provision that would be enacted by this Bill would apply not only to claims in tort, but also to some claims in contract, namely claims for damages for breach of a contractual duty of care, they would be removed from the Wrongs Act and placed in the separate Act. Enacting contribution and contributory negligence provisions in the separate Act is not novel, it is the way the legislation most other jurisdictions has been enacted.
The parties have not drawn to my attention and I have not become aware of any South Australian authority that has considered whether the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 applies to a claim for breach of a contractual duty where there is no concurrent tortious duty. However, as I have indicated, in my view, the legislation is to this effect.
The Bank relies on the following matters of conduct by Mr Haynes as materially contributing to any loss sustained by reason of the Bank’s conduct. He:
(i)purchased the Longwood Property without having first:
•    obtained finance approval;
•    sold the St Peters Property;
•    executed the contract subject to the sale of St Peters property;
•    executed the contract subject to finance;
(ii)failed to obtain financial or accounting advice before accepting the Loan Offer;
(iii)failed to inform the Bank that he was, as alleged (but denied by the Bank), relying on the Bank’s assessment of the Loan Offer in deciding whether or not to complete the purchase of the Longwood Property.
(iv)failed to obtain his own valuation of the St Peters Property before:
•    signing the contract to purchase the Longwood Property
•    accepting the Loan Offer
In addition, Mr Haynes was, at all times, well aware of the extent of his capacity to service the extended limit and the risks, in this respect, that any delay in selling St Peters might pose.
In my view, Mr Haynes was substantially the author of his own loss. It is true that he could not proceed with his plans without the Bank (or some other financer) agreeing to lend him the necessary funds and that the Bank assumed the clause 25.1 obligation in this respect. However, Mr Haynes was fully aware of the risks accompanying the transactions he was pursuing. He was not misled by the Bank in any material respect. Section 7(2)(b) requires the Court to reduce the damages otherwise payable “to the extent [it] thinks just and equitable having regard to the extent the contributory negligence contributed to the harm”. I am satisfied that in the event Mr Haynes were to succeed in proving a liability in damages against the Bank, that liability should be reduced by 75 per cent on account of his own contributory negligence.
Conclusion
The Bank’s claim in Matter No. 1211 of 2014 is allowed subject to the amount due and payable being adjusted in the following respects in accordance with these reasons:
(i)The Bank’s pre-judgment interest calculation is to be brought up to date.
(ii)The Bank’s pre-judgment interest calculation is to be adjusted on the basis that the FDA should be treated as having been discharged upon receipt by the Bank of the St Peters settlement proceeds.
Mr Haynes’ claim in Matter No. 1436 of 2014 is dismissed.
The Bank is to provide draft minutes for final orders consistent with these reasons. Insofar as is necessary, I will hear the parties further on any outstanding costs issues.